When cost-cutting isn't enough

By Alan Anderson, General Manager, Strategic Consulting, Fujitsu Australia

"How can we improve our profit and return to shareholders?"

Today this perennial question has an increasingly unforgiving context. CEOs face insistent expectations to deliver regular growth in shareholder value in ever-shorter timeframes. Competition is more intense. Businesses must adapt more quickly - yet CEOs are often permitted only a single failure. The average shelf life for a CEO in Australia is now about 18 months and falling.

CEO vulnerability takes on an even greater edge in the context of research showing that some 90 per cent of company projects fail to deliver the full value expected. Although the chart below identifies a range of reasons for these failures, the majority stumble in execution. This indicates that corporate decision-makers need approaches that can adequately define the value target and that are structured for successful business execution.

From cost-cutting to value creation

In recent years, executives have often pursued a cost-cutting strategy looking for low-risk and incremental steps to profit. Nowadays, many companies are finding this to be a somewhat blunt instrument that delivers only transient gains. Once the easy cuts are made, creating additional savings becomes ever harder.

CEOs looking to build value through new markets, products or business lines can draw on a wealth of advice from traditional business texts. In contrast, wise words about profit improvement seem to dry up when the company has limited capacity or opportunity for such obvious expansion.

This type of challenge requires CEOs to dig deeper to develop more sophisticated approaches for sustained value creation. Fujitsu's experience suggests that almost every organisation has opportunities for true and sustainable value growth. Yet most of these are harder to find and need careful prosecution. Such opportunities flow from generating new value from old assets - particularly intangible assets that are already 'owned', like distribution channels, customer segments, people, processes and culture.

Creating sustained value

Based on many years of experience working with customers to create enduring business value, Fujitsu adopts one or more of four approaches according to the client's business profile. The four approaches are yield improvement, line of sight, enterprise architecture and value mapping. Each moves well beyond simple cost-cutting, and all four support both incremental and managed execution.

Each approach focuses on a different footprint within the business and leverages one of two generic techniques:

• Optimisation for short-term impact to improve the operating business and generate immediate value
• Synergy and structural initiatives to generate long-term value through improved business models that streamline performance

These techniques are applied against the relationship assets of the organisation (products, distribution channels, customers) and/or against the internal assets of the organisation (human capital, processes etc).

Yield improvement

This approach has the greatest potential for short-term value creation. Yield improvement involves optimisation through segment analysis focused on products, customers and distribution channels. Initial improvement scenarios developed against one of these assets can be refined and extended for further value creation when combined with the other asset classes.

Yield improvement combines activity-based cost and revenue analysis with customer marketing to facilitate calculations about the actual profitability of individual customers or product lines. This enables Fujitsu to help the client identify the right levers to retain profitable customers and make unprofitable customers turn a profit. This may include a program of selected churn and repricing or cross-selling initiatives to make marginal customers more profitable.

Fujitsu expects yield improvement to identify steps that can improve the profitability of a line of business within 12-18 months and increase the value of a customer group by at least 20 per cent. This boost is not a one-off; rather it creates a sustained step-change in performance over time. Moreover, while some yield-improvement levers originate in the cost side of the business, the majority are focused on revenue improvement - with every revenue dollar going straight to the profit line.

On a recent assignment for one of the domestic banks we found that approximately 30 per cent of credit card customers contributed to the business while the rest destroyed value - to the point where the portfolio hardly made money. We identified the characteristics of profitable customers as well as reasons why others lost money for the bank.

As a result, our client implemented a program to capture the value it was losing. Already the bank has achieved some startling results by better targeting its marketing initiatives, repricing and other incentives. Profiling potentially profitable customers enabled targeted direct-marketing and selective cross-selling initiatives that boosted revenue and helped convert marginal cardholders into profitable customers.

Line of sight

Businesses are complex, with many interrelated functions and cross-departmental boundaries creating a series of building blocks. Each business building block has the potential to 'break' the business if it is not functioning effectively or does not remain sensitive to changing business demands. Yet the choke points across the business are often not fully understood.

Line of sight is an optimisation approach that works across the normal process boundaries within an organisation. Understanding the linkages, identifying the range of options and optimising capacity can yield cost and efficiency savings running into millions of dollars.

An example of Fujitsu's line-of-sight approach comes from a financial services company that decided extended opening hours were required to gain strategic advantage. The company developed a plan to open key branches on selected weekday evenings and at weekends. When the sponsor approached the IT department with the proposition, IT estimated that supporting extended hours would cost an additional $30 million. This price tag reflected the cost of capacity bottlenecks, overnight processing windows and back-up tasks. The $30 million bill destroyed the project's business case, pushing the break-even point out to year four.

Line-of-sight techniques enabled us to identify a range of alternative strategies for both business and IT and model each to assess its business impact.

This modelling allowed us to develop an alternative approach that facilitated extended trading hours without excessive investment, ensuring profitability within 12 months. The same approach was subsequently applied in other areas of the business, and has now become a core component of the company's annual planning process.

Enterprise architecture

Synergy approaches seek to maximise value by looking for commonality and causal relationships across the whole organisation. As a result, organisations are finding that they can derive significant value by establishing the right structural fabric through a business-based enterprise architecture.

Meta Group estimates that organisations applying this approach achieve IT infrastructure cost reductions of approximately 30 per cent over a five-year period compared to peer companies not applying the same approach. In many cases, an enterprise architecture approach can even go further to create value for the business. These returns do not come cheaply, with upfront investment required plus ongoing investment to sustain the architecture. Nor do these gains offer instant gratification, with focus generally directed to improvement scenarios that continue over the long term.

Value mapping

The second approach to maximising synergy value involves aligning an organisation's intangible assets to ensure they support its primary objectives. This approach brings to the surface relationships between a range of internal assets that are normally hidden from view.

While this area of work is not nearly as mature as enterprise architecture, it has already provided several organisations with effectiveness breakthroughs that generate appreciable returns. Value-mapping approaches are particularly valuable where an organisation knows its strategies are not working internally, but cannot see the reasons for failure.

Careful execution unlocks value

Regardless of which tools are used, experience shows that many firms can still derive significant value within the confines of existing operations. As enterprises exhaust the short-term gains associated with cost-cutting, more and more companies are turning to trusted partners like Fujitsu to help them dig deep to uncover new value opportunities and to ensure returns are maximised through carefully managed execution.