Lower your cost income ratio in the Digital age

Transcription

1 Advisory Lower your cost income ratio in the Digital age Operation find the money Ken van Ierlant Amsterdam

2 All commodity businesses face the challenge of increasing C/I ratios ING experienced a strong incline in their cost/income ratio in Mr. Hommen CEO said 60% of our clients has gone mobile in 6 months leaving 1,5 billion in investments idle Underlying cost/income ratio (in %) 80% 75% 75,70% 70% 65% 63,40% 60% Cost/income ratio excl. market impacts & CVA/DVA Cost/income ratio 55% 50% 45% 40% 4Q11 1Q12 2Q12 3Q12 4Q12 2

3 ... conventional response, protecting the top-line is no longer possible when disruptive market change occurs... and conventional (time and capex intensive!) transformation approaches won t work anymore due to required speed and financial constraints Price increases help boost short term profits while efficiency measures drive under-investment in the business... Company X manages a Legacy profit pool Today Disruptive market change occurs Revenue base Cost base A classic transformation program is announced, absorbing cash and resources Cash flow Capex Time So the legacy profit pool evaporates rapidly and financial distress is close but financing capacity to fund the transformation is limited or absent 3

4 Case study C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx While more and more businesses are experiencing disruptive market changes, creating the need to move to an agile E2E operating lean & flexible cost structures... Traditional operating models have high fixed costs and are asset heavy Operating model New operating models are agile, and geared towards rapid adaptation... Disruption Disruption disrupts the disruptor Customer proposition Purchase & Ownership Ownership Purchase Own / Rent Subscription & Usage as a service Usage Revenues Transaction based Transaction based Subscription based Cost structure High fixed costs Flexible costs Flexible costs Assets Tangibles Intangibles Heavy Poor Light Rich (data!) Averse Rich (data!) 4

5 ... the conventional PAVLOV response; investing heavily in on premise IT, independent from disruptive market changes actually increases the C/I ratio while making the IT vulnerable to cyber breaches Traditional business response has a negative effect on the C/I ratio and RoIC The risk of data breaches increases as well as the financial and reputational impact Medium and long term effects 1 Supply-based value proposition Linear customer journeys Limited range revenue models Static pricing & rebate structures Customer Experience Revenues C/I ratio 46% of the security incidents were related to loss or theft. 15% of the security incidents were caused by internal abuse of information and rights. 12% of the incidents were caused by unintended actions which resulted in uncovering of confidential information. 2 Siloed operating model Classical E2E supply chain Diverse functional departments Capex & working capital rich 3 Static /siloed digital presence Scattered landscape of legacy IT Siloed (customer) databases Capexed and outsourced IT Target Operating Model Enabling technology Costs RoIC Capital base 75% of the higher management expect reputational damage because of data breaches The EU is developing new legislation in order to increase the protection of personal information; the key points of the concept privacy regulation EU are: 2%-5% or 100 million euro of the world wide revenue in case of regulatory offence Appoint an employee for data protection compulsory when dealing with data of more than 5000 people per year Source: analysis, Forrester Research Source: analysis, IBM cost of data breach study 5

6 Functional departments Store Web App Store Contact center Web App Customer contact center C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx The new Digital proof operating models are geared towards homogenous customer interaction across channels, and across organisational siloes... Traditional operating models have high fixed costs and are asset heavy Operating model New operating models are agile, and geared towards rapid adaptation... Market / Customer KPI s per channel Homogenous UX (physical + online) across channels KPI s aligned across channel Sales & marketing organized per channel Integrated customer journey design Customer lifetime management Data analytics & machine learning Product development / R&D Siloed functional departments CRM as a service Vertical (industry specific) SaaS ERP as a service Opex lean & capex averse! Siloed IT on premise (=capex!) Master data management IaaS / PaaS 6

7 Product margin Product margin C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx The Digital Value Chain Transformation emphasizes on a step change journey to free up working capital by reducing costs and increasing revenue by making the operating model fit for the digital customer journey It creates momentum for drastic cost reductions and makes the operating model fit for the digital customer journey Pricing strategies & Demand Analytics help identifying unaddressed value to customers + revenue potential High profitability products Customers Market strategy Business model Low profitability products Products Negative profitability products Finance Digital transformation Products with negative margins could drive sales in other products People Technology/ IT Operating model Products Long term customer value chain Products with a negative margin, even when taking into account their cross-sell impact 7

8 Complexity C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx... enabled by full replacement of operational and IT legacy, based on IT as a service, i.e. capex averse. With the majority of players being American, it infuriates the discussion around the U.S. patriot act Static / siloed digital presence Scattered landscape of legacy IT Siloed customer databases Capexed and outsourced IT Much shadow IT Enabling Technology Master customer data model Real-time analytics & data mining Straight-through transaction processing Opex-driven IaaS/PaaS/SaaS-based front- and back office technology architecture From siloed IT legacy.... to adoption of IT as a Service Big Data Social Media Apps SaaS PaaS IaaS The advantages of SaaS Reduces the financial risk of investing upfront in IT projects Improves cost structure Allows IT to scale as needed Reduces the cost structure and makes it more flexible Enables focus on the core and value added business processes Allows for rapid adaptation to new functional requirements because new functionality can easily be opted-in and works smoothly with the entire stack Time 8

9 FROM TO Complexity C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx Digital Value Chain Transformation: Taking IT in the cloud end-to-end, can enhance companies cost leadership while being more agile to adapt to changes Build an extra layer on the current IT infrastructure (High Capex and Opex) Illustration of expansion of legacy IT systems over time Time Legacy IT systems hamper future growth as these systems are band-aided together and guarantee business silos maintenance and staffing costs are high and growing, leading to high and inflexible cost base concerns on compliance to regulations are increasingly present limited functionality limits innovation and growth as lack of agility makes it impossible to meet demands of tomorrow s client Redesign the on premise spaghetti to linguini in the cloud (High Opex) Illustration of taking IT infrastructure in the cloud with point solutions Apps SaaS PaaS IaaS Implementing point solutions in the cloud does not lead to significant cost reduction and enhanced functionality as these systems still need tailored solutions to connect infrastructures of different vendors implementation and maintenance costs remain high, not reducing the cost base significantly different vendors need to be checked with respect to compliance limited functionality across vendors limits innovation and growth Take the IT engine in the cloud end-toend: Capex-reverse and pay-per-use (No Capex, Low linear Opex) Apps SaaS PaaS IaaS Capex Capital invested in hardware, software and infrastructure Opex Technical-, Functional- and Application management Development of new applications Inefficiency supply chain Shadow IT (Capex/Opex) The advantages of SaaS Reduces the financial risk of investing upfront in IT projects Improves cost structure Allows IT to scale as needed Enables focus on the core and value added business processes Allows for rapid adaptation to new functional requirements because new functionality can easily be opted-in and works smoothly with the entire stack This results in a lower C/I ratio Illustration of cost reduction by taking the IT in the cloud High Capex, High Opex Proprietary IT No Capex, Low Opex - 80% Cloud computing Take the IT engine in the cloud: Capexreverse and payper-use IT Non-IT 9

10 So: the digital transformation goes beyond digitizing the off-line business and aims at enabling an accelerated business transformation along a profitable growth path DT: Top-line driven lean & flexible cost structures capex averse Traditional business 1 Supply-based value proposition Linear customer journeys Limited range of revenue models Static pricing & rebate structures Predetermined product packages Customer experience The 4.0 digital enterprise Outcome driven customer proposition Interactive UX & customer journeys Integrated on/off-line user experience Adaptive & blended revenue models Real-time pricing & comparison The Business case Revenues C/I ratio 2 Siloed operating model Classical E2E supply chain Diverse functional departments Majority of processes are generic Capex & working capital rich Operating model Integrated operating model Closed loop marketing, PD and R&D Agile product development Processes customer delivery oriented Capex averse / reduced working capital Cost RoIC 3 Static /siloed digital presence Scattered landscape of legacy IT Siloed (customer) databases Capexed and outsourced IT Much shadow IT Enabling technology Master customer data model Real-time analytics & data mining Straight-through transaction processing Opex-driven IAAS/PAAS-based front- and back office technology architecture Capital base 10

11 DVCT aims at re-imagining & transforming business along a profitable path Lessons learned: one needs to start earlier then one thinks is needed Digital is a disruptor Business re-imagined! Digitization as a source of innovation and sustainable business transformation 1 Managed migration of revenue base Today?? Transition period (short term effects) Business Program reduces costs by significant change of operating model Revenue base Medium and long term effect: Higher revenue base, lower costs and asset light. Cost base Cash flow Time Capex 4 Protecting the profit pool 3 Operating model is capex averse 11

12 The 4.0 digital enterprise transformation will create two types of firms; Capex and Opex firms Capex organisation Invests in tangible assets with a recurring business model in co-creation with the client Balance Opex organisation No investment in tangible assets with a transactional business model, customer journey driven Balance Tangible fixed assets +++ Equity Tangible fixed assets - - Equity Trade receivables depends on quality of clients Long term liabilities Trade receivables Suppose no impact Long term liabilities Cash and cash equivalents - - Current liabilities +/++ Either less cash or an increase of liabilities Conclusion: Same or bigger balance and (strong) client portfolio Profit and Loss Revenue ++ (changes from one off to recurring [longterm] revenue) Personnel costs suppose no impact change to more technical staff, less sales? Depreciation + Other costs Net result + depends on a successful transformation Revenue will at first possibly get a negative impact on the credit rating due to the change from one off revenue recognition to recurring revenue recognition. At the end this will lead to a more sustainable recurring revenue and result and a positive impact on the credit rating. This will also realise more shareholders value and better ratios of the company. Cash and cash equivalents +++ Current liabilities (No investment, cash in company) Either more cash or a decrease in liabilities Conclusion: Smaller or better balances Profit and Loss Revenue +++ Personnel costs - Less to none IT personnel Depreciation - - Other costs + + (Opex costs) Net result ++ Fixed depreciation, changes to flexible other costs If available cash is not used for investment in tangible fixed assets it can more or less be used for repayment of debts or innovation of the core business. This will lead to an increase of the client portfolio, which leads to a more sustainable turnover and better result and a positive impact on the credit ratings. This will also realise more shareholders value and better ratios of the company. 12

13 The 4.0 digital Opex enterprise is characterized by having a large value compared to its assets, referred to as digital intangible assets (DIA) created by data, what will your DIA be after your digital transformation? Good data management creates a large DIA and value the digital transformation, moving Capex to Opex and pay-per-use enables proper data management creating value and a high DIA Estimated net value of data-driven companies in billion USD How much will your DIA be worth? 13 8 Facebook Uber Airbnb Linkedin Source: analysis 13