Tag: Functional Insights

a-connect addresses Pharma Stakeholders at the World Pharma Pricing & Market Access Congress 2016

Posted on March 4, 2016 - 2:22 pm by

Overview

a-connect attended the World Pharma Pricing and Market Access Congress 2016, held in London on 24–25th February. Representing a-connect were Claire Hempshall (P&MA Lead), Zornitsa Petrova (P&MA Director), Aunia Grogan (Global Head of Life Sciences) and Romjan Ali (Independent Professional). The conference was well attended by global industry stakeholders, including payers, pharmaceutical companies and pharmaceutical consultancies, many of whom visited the a-connect booth. On the first day of the conference, Aunia Grogan presented a paper entitled ‘Establishing and Maintaining Access in an Evolving Environment’.

Summary of Aunia Grogan’s paper

In order to achieve continued growth in a changing environment, the pharmaceutical industry must tackle a number of core questions and challenges.

What are the key challenges the pharma industry is facing?

Over the last decade, we have seen a number of important evolutions in the industry:

  • Market dynamics: increasing importance of emerging markets, increased use of stacked or combination therapies, increased use of generics and biosimilars, shift to personalised medicine.
  • Industry structure: greater regulatory hurdles, increased role of the payer, emergence of risk sharing/patient access schemes.
  • Product mix and provision of care: move from primary to secondary care, focus on orphan indications, focus on new technologies (e.g. gene therapies), standardisation of treatment pathways.
  • New science and technologies: increased capture of patient data, availability of the cloud, proliferation of social media, growth of mobile applications for smartphones.

How is the industry responding?

The end of the blockbuster era has created tremendous pressure on the industry to maximise value from its assets, and this requires a launch model which delivers both speed and quality of execution. The industry is exploring numerous avenues to achieving this: i) enhancing launch planning, ii) implementing launch academies, iii) introducing a project management office (PMO), iv) developing personalised healthcare capabilities, and v) expanding evidence generation (health economics and real-world evidence).

What does this mean for P&MA?

The evolving operating model has had a huge impact on the P&MA team. More is expected of the P&MA team—greater knowledge, increased technical expertise and enhanced business skills—despite there being fewer resources overall and a need to ‘do more for less’.

What do you mean by ‘knowledge’?

The P&MA team are now expected to know about a greater number of emerging markets, all lifecycle stages and funding routes that would not have been explored in the past.

What do you mean by ‘technical expertise’?

The P&MA team must understand complicated science and complex evidence, develop sophisticated argumentation and tools, and create and execute intricate agreements.

What do you mean by ‘business skills’?

The P&MA team needs strong problem-solving and time-management skills and the ability to work within multi-disciplinary teams in order to effectively support the business.

Are we ready to meet these challenges?

The following questions will help you determine whether your team is ready:

  • How well integrated is your P&MA team with other teams across the business?
  • Are you involved early enough in commercial decision making?
  • How effective is the team in influencing internal and external stakeholders? Are you able to ‘manage up’ and effect necessary changes in the organisation?
  • Do you have skills gaps around specific markets, technologies or services?
  • How well equipped are you to deal with spikes in demand?

Key learnings from the conference

There is no end in sight to the pressure on the pharmaceutical industry to justify prices in an environment of constrained public healthcare budgets and a patient- and media-driven backlash against perceived unjustifiably high prices. The industry must communicate value in terms that are understandable and relevant to all stakeholders, regardless of their role and drivers. The challenge is that there continues to be no common approach to assessing and determining the value of drugs. This is unlikely to change in the near future, despite ongoing efforts to develop a consistent approach by the European Network for Health Technology Assessment (EUnetHTA), among others.

Disruptive healthcare technologies (such as ‘cures’) create huge challenges for payers who are constrained by short-term budget pressures. Adaptive pathways and early access schemes mean there is limited evidence on which to assess value. Affordability is a big challenge because there is often a change in payment terms (i.e. costs previously spread over many years are now condensed into weeks or months). In addition, current P&MA systems limit the opportunity to move away from a ‘price per pill’ mind-set—a move that could help improve affordability for payers.

 

About a-connect, the human resourcefulness enterprise

At a-connect, we help leading global businesses confront the future by increasing the pace and impact of their critical projects. With our unrivalled global network of experienced independent professionals, we create winning teams with the perfect combination of skills, experiences and qualities, to supplement your internal team and to provide you with a consulting service that is more thoughtful, individual, imaginative and enterprising. This is what we call human resourcefulness.

For more information on how our team of Life Sciences and P&MA experts can help you prepare to confront key industry challenges, please email us at info@a-connect.com or visit www.a-connect.com.

Measure to manage

Posted on April 26, 2016 - 12:00 am by

In today’s competitive business environment, we need capable metrics to (a) recognize success so we can learn from it and (b) recognize failure so we can correct it. In reverse this means that, without capable metrics, we can’t manage or improve anything – or as H. James Harington said: “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”

About Measures, Metrics, and Indicators

As a first step, let’s clarify the difference between measures, metrics, and key performance indicators (KPIs). A measure is simply neutral information, a reading from an instrument, such as a scale or compass. A metric is a measure that provides vital information to someone who can influence the measure through direct efforts. An indicator can be a measure or a metric, whereas a key performance indicator (KPI) provides information that is mission-critical for an individual, a team, or a business. For example, revenue is a key indicator for the sales team, but just a measure for the finance team. For a runner, lap-time is a key performance indicator, heart rate is a metric, and her shoe size is just a measure.

Leading versus lagging Indicators

There is one more characteristic we need to understand before developing universal or “golden” metrics – the relationship of the measures to time. We classify indicators as leading and lagging. Leading indicators anticipate future events, while lagging indicators only change after events. Leading indicators are typically input-oriented, hard to measure but easy to improve or influence, whereas lagging indicators are typically output-oriented, easy to measure but hard to improve or influence. Weight loss is a good example; it is clearly a lagging indicator that is easy to measure by stepping on the scale, but not as easy to influence. For weight loss there are two leading indicators, the calories consumed and the calories burned. Calories are easy to influence by the amount we eat and the way we exercise, but much harder to measure than their output, our weight. Let’s translate this to business. Most financial indicators such as revenue, costs, and profit are lagging indicators that track the results of the activities of the company. To effectively manage teams, however, we need to track leading indicators (inputs) that have a strong impact on business performance (outputs).

The 3 Golden Metrics

If you are like most managers, you have certainly asked yourself which metrics matter most. To improve your team’s performance, there are a thousand things you could potentially measure but only a handful that will really help you advance. We can narrow down the field to those metrics that (a) you have direct control over and (b) clearly influence overall business results. Combining those metrics on a single sheet builds the team’s scorecard, which is a key component of any performance management system (PMS). There are two relevant questions that we need to ask: What information is essential to effectively manage a team or department on a daily basis? Which metrics are universally applicable to any business? To manage a team’s performance, we find three factors that are universally applicable and essential to know: (1) the amount of work accomplished within a given time period, (2) how well the work meets customer needs, and (3) the amount of resources consumed to accomplish that work. In short, that’s Quantity, Quality, and Productivity. Those three metrics are universally applicable, no matter if you are running a bakery, bistro, brewery, or bank.

Quantity

The quantity metric tracks the amount of work completed within a given time or the amount delivered by a requested due date. The essential reference points are the production schedule in a make-to-stock (MTS) environment, and the due date per customer order in a make-to-order (MTO) or service business. Common quantity metrics are throughput (units per day) or on-time delivery performance (OTD).

Quality

Quality is a measure of excellence or a state of being free from defects, deficiencies, and significant variations. Quality or “fitness for purpose” can therefore be expressed in positive or negative terms, as success or failure, yield or defect rate. Because most people respond strongly to things that go wrong, most quality metrics track rework, rejects, returns, delays, or backlog, relative to the amount of work completed.

Productivity

The productivity metric looks at the actual output over the actual input, the amount of work completed over the amount of resources consumed, such as units per labor hour or miles per gallon. Productivity is a useful metric when a product or service is made-to-order (MTO) and directly accepted or consumed by the customer. For make-to-stock (MTS) businesses, however, it is more useful to track efficiency, the actual input over the standard input, because the product is first inventoried and not shipped or consumed right away.

Putting it all together

The three golden metrics – Quantity, Quality, Productivity – provide an ideal framework to manage any team in any business. Those metrics are essential to build a team’s scorecard and performance management system (PMS). You might ask: are there any other metrics that are necessary or relevant? The short answer is: it depends on what results you want to drive. But in any case, you should start with the golden three and add only those metrics that improve your level of understanding and control. In addition to the golden three, teams in Lean environments also track housekeeping score (5S) as a leading indicator, and customer satisfaction as a lagging indicator – making a “Golden Five” for the Lean team.

How well do you manage Performance?

Performance metrics are important to any manager in any business, but are only one of many elements of a world-class operating system. If you are interested in evaluating the effectiveness of your current management system, then I recommend that you perform the “Lean Audit”, an online survey to assess the 20 keys to world-class operations here. The Lean Audit is essentially a health-check for any factory or office that allows you to gain better insights on what is already working well and what needs to be improved. As a result you get a maturity score on a 5-point scale, where 5 denotes a world-class level. More information is available in the Lean Audit workbook on Amazon. It includes the research on over 100 companies, checklists for self-assessment, as well as a blueprint to design your journey to world-class status. I look forward to your feedback and further discussions and suggestions on these topics.

Today, no company can afford to ignore CSR

Posted on July 28, 2016 - 1:29 pm by

Since the launch of the so-called Corporate Social Responsibility (CSR) Directive (2014/95/EU) by the European Parliament, more and more companies in Europe are engaging with CSR. According to the directive, large publicly listed corporations as well as banks and insurance firms with more than 500 employees have to include non-financial indicators in their annual reports from 2017. Often described with terms like “CSR” and “sustainability”, these indicators apply to environmental issues as well as employee-related, social and human rights concerns – all of which demonstrates a new way of thinking about and managing businesses. Accordingly, companies should no longer go after short-term profit, but establish long-lasting values, in economic as well as ecological and social terms.

However, the calls for companies to act more responsibly are not only political; increasingly, other stakeholders like investors, customers, civil parties and employees expect action from companies.

Investors pay attention to sustainability   

Current developments like climate change, the growing resource scarcity and insufficient social standards in the supply chain lead to higher risks for companies and are a reason why investors are focusing on sustainable enterprises. Institutional investors in particular include the CSR or sustainability performance of a company in their investment decisions.

On top of typically asked questions on diversity and environmental actions during shareholders’ meetings, investors also look at sustainability rankings and ratings as part of their decision making. In addition to the Dow Jones Sustainability Index, a company’s CDP ranking (managed by a non-profit organization originally known as “Carbon Disclosure Project”) is increasingly considered. Each year, CDP conducts a survey of approximately 5,000 companies worldwide, looking at their strategies to reduce carbon dioxide and their handling of resources like water and wood (see www.cdp.net). Both the number of participant organizations and interest from investors is growing year by year. At the time of writing, 822 investors support CDP, with a total amount of USD 95 trillion assets under management. Since 2009, CDP has partnered with the financial news company Bloomberg, which has been publishing “ESG” data (i.e. data on ecological, social and governance issues) from more than 5,000 companies. This data is accessed around 1.5 million times each year.

Retention and expansion of the customer base

The customer’s purchase decision and the company’s brand image increasingly depend upon the customer’s sense of how ethically correct the product and company is. Today, the customer demands more than a high-quality end product. Global NGOs use this increased customer awareness to denounce unethical behavior, such as working conditions in the apparel industry. However, retailers also come under close scrutiny; for instance, American organic retailer Whole Foods experienced a wave of protest on social media channels because it packed peeled oranges in plastic boxes.

At the same time, companies recognize the potential to retain existing customer segments or to expand into new ones by having a targeted CSR image. For this reason, the additional customer segment LOHAS was identified in developed countries. LOHAS stands for ‘lifestyle of health and sustainability’ – a customer segment characterized by high purchasing power and a lifestyle orientation towards naturalness, authenticity, participation and health. This target group is considered as having an above-average education and a high income. They consume quality-oriented, health-conscious products and always look at the social and environmental compatibility of a company’s offering. Examples such as Fair Trade at Ben & Jerry’s or the BMWi electric vehicles show the trend for promoting sustainable products in order to increase customer acquisition or retention.

Companies are also exploiting CSR opportunities by developing CSR strategies focusing on social innovation and offering specific products solely for developing countries. A couple of years ago, General Electric (GE) developed a new electric cardiogram (EKG) specifically for the Indian market. Instead of costing USD 10,000, the new EKG costs only USD 500. On top of that, it is small, robust and easy to handle. The product has proven popular beyond India; it is now being sold in 120 countries and is even being used in the US and Europe, mainly in ambulances and small medical practices.

Interestingly, many consumer goods companies sell their products in smaller packages in India; for example, Cadbury, Mondelez’s best-selling brand of chocolate bar, is available in a 7-gram bar for 7 cents. The larger bar costs USD 2. Furthermore, L’Oréal sells its hair products in smaller packages and single-use sachets for 4 cents. In 2015, more than 50% of India’s personal product sales by volume came from small packs (China and Brazil: <30%; US and UK: <20%). L’Oréal’s Head of India has confirmed that if a company does not adapt sizes to less affluent customers then “it cannot exist in the Indian market”.

Interest of employees and job applicants in CSR

The labor market is facing a big change. Generation Y-ers, born between 1980 and 1990 and well-educated, are flooding the labor market. A good career and development opportunities are still important. However, employees and job applicants now also look very carefully at the companies for whom they work. Employers with a stronger, more authentic brand are more likely to attract younger, more motivated talent. In this respect, CSR also plays an important role; for instance, HR consulting company Egon Zehnder is convinced that, today, young talent want to work for an employer that demonstrates socially and environmentally responsible behavior. Ethics and integrity are highly valued by this generation. They prefer companies that engage socially or give them the opportunity to make the world a better place.

CSR as the success model of the future 

Companies who want to meet the challenges of the future can develop new products and markets via social innovations. This allows them to reposition themselves even in times of saturated and highly competitive markets. CSR and sustainability is no longer a side issue for idealists – it is a central theme of the modern understanding of strategy and management. Executives should view CSR and sustainability not only as one-sided risk and environmental management or patronage; instead, they should understand it as the systematic identification of opportunities that also contribute to sustainable development. In this way, not only is the risk minimized, but also motivation, innovation and long-term success are encouraged.

In order to maximize these opportunities, internal changes need to be made that incorporate CSR and sustainability within the core business. This integration should take place across three dimensions:

  • Strategy and Management, with quantifiable CSR targets and KPIs; for example, H&M has set a target to reorganize its cotton production to 100% sustainable cotton by 2020.
  • Structures and Capabilities, with determined resources that drive the CSR targets within their departments.
  • Culture and Values that encourage an innovative culture and create open space for managers to implement fundamental changes.

In this way, CSR and sustainability initiatives can achieve maximum buy-in across the organization. That, in turn, will help the organization attract the best talent, and keep customers and investors happy in the coming years.

Perspectives on CSR – a-connect insights from a recent diagnostic project at a Fortune 500 client

Posted on July 28, 2016 - 12:09 pm by

We are currently supporting a Fortune 500 Corporation in the Life Science industry in developing a unique and differentiating CSR strategy. To do so, we are deploying a bespoke international team of three expert IPs during a 14-weeks period.

The current effort follows an in-depth diagnostic project, which we have performed earlier this year for the same client in a similar time frame and team intensity. There, we took a very close look at the CSR (best-)practices at leading corporations in the Life Sciences, (Agri)Chemical and Food industries. Our extended network, consisting of our IPs as well as other “friends of a-connect”, was crucial in delivering very detailed and highly relevant insights for our client.

Many of the companies we studied are both highly motivated and equipped to solve complex social & environmental issues. However, their motivations for CSR activities are very different, as the following exemplary quotes express:

  • “We want to enhance our reputation, by doing good and talking about it”
  • “We need to meet our stakeholders’ expectations”
  • “We want to be altruistic and share a part of our profit”

“We are convinced that doing business needs to be inclusive, sustainable and ethical.”

Corporations apply a portfolio of options in CSR, ranging from classic philanthropy and zero-profit activities to shared value programs.

Classic philanthropy stands for a pure giving-based approach. An average of 1% of pre-tax profits are granted across sectors, mainly to organizations focusing on Education, Health and Economic Development. Zero-profit activities mean that a company provides its products at cost-covering prices to selected target groups.

While philanthropy and zero-profit activities are rather reputation- and risk-driven, shared value programs are commercially driven in addition. The objectives are to earn money for the own company and at the same time achieve a significant positive social or environmental impact. There are several options available in shared value:

  • Corporate Venture Capital: Directly invest in social enterprises
  • Impact Funds: Invest in funds that invest in social enterprises
  • Corporate Social Innovation (CSI): Operate a social enterprise with or without partners.

Given we are very active in the Life Sciences and Agri industries, please let us highlight two very impactful shared value initiatives driven by corporations in these industries.

Novartis – Healthy Family Program

The goal of this initiative is to build self-sustaining health networks in remote villages. It was piloted in India in 2007, with a scalable network of “health educators” – 1 to 5 per village. Each educator earns 10% commission on the sale of medicines. This has been supplemented with mobile health camps – 1 per 5 villages – for screening, diagnoses, and treatments. The program turned profitable after 2.5 years already. After 5 years, 33,000 villages have been served, 10 million people educated and 760,000 people directly diagnosed and/or treated. The program has now been successfully expanded to Kenya, Vietnam and Indonesia.

Syngenta – Kilimo Salama Smallholder Insurance

The goal of this program is to mitigate smallholder farmer risk of weather shocks with an innovative agricultural insurance. A network of automated weather stations is operated to monitor conditions. The respective premiums are paid via mobile payment solutions. This turned out to be much more cost-effective than traditional models. By now, Kilimo Salama insures far more than 100,000 farmers in several developing countries.

There is no single right answer for an effective CSR portfolio mix for every company. To define the specific portfolio requires clarity on the specific corporate objectives, priority stakeholders, type and size of targeted impact, as well as the planned leveraging of employees, assets and partners.

Philanthropy and zero-profit remain important building blocks of the corporations’ CSR programs. But we see increasing activity in Shared Value, especially in the entrepreneurial CSI space, where companies strive to achieve truly sustainable win-win situations. In order to be successful our clients rely on the expertise and thought leadership of our Independent Professionals!

Replicating business success: Creating an effective strategy for new markets

Posted on September 15, 2016 - 12:00 am by

Expanding into a new territory presents an exciting opportunity, but a central challenge to this arises when an organization tries to apply global strategies to a new and unknown market. Often, an organization relies heavily on the existing tried-and-tested global business strategy, replicating it with a few adjustments – but the resulting strategy can lead to unrealistic expectations for growth, and may underestimate the organizational and operational capabilities of your local team. However, if you develop a greater understanding of the local market and your local team’s strengths, you can optimize success across every location.

Large organizations may try and work out why their global strategy isn’t translating well to a new location. The business may look to the local team in hope of finding an explanation, but the responsibility lies first with the parent company to foster an in-depth understanding of how the business operates. While it can be tempting to assume that your team is well-versed in your company’s strategy from top to bottom, a recent survey indicates that few executives truly understand their organization’s global strategy. The negative consequences that can arise from attempts to replicate a global strategy within a local unit may then be amplified by inconsistent and unclear communication from senior management. Without comprehensive understanding and a compelling vision, local teams can move off-course and make poor strategic decisions.

If a local business isn’t performing as expected, it’s important to evaluate why this is happening before you take drastic action. Sending in a manager from another location to solve the problem because they’ve been successful elsewhere – or asking someone to take charge from a distant overseas office – may sound like a smart move, but generating local business success isn’t as simple as copying and pasting your strategic approach across the world. Replicating effective strategies can lead to business failure elsewhere, because this cookie-cutter approach doesn’t take into consideration all the differences that make every location unique: the cultural differences that impact your organization’s operations and create an environment where your business can thrive.

 

Factoring in the local business environment

Identifying the cultural differences present in a new location can help you to understand the strengths they offer your business and overcome the barriers to excellence that may inadvertently appear. The cultural differences in a new location can make replicating your global strategy difficult, because they impact how your business is organized and how it operates. If you don’t take into account the nuances of each location when you’re considering the core aspects of your business (such as the 4 Ps – Price, Product, Placement and Promotion), your operations may be quickly undone by local differences such as a country’s size, climate, consumer behavior, social and economic differences, infrastructure (ports, roads), tax legislations, and so on – and the list for every country will have additional localized idiosyncrasies. Business success relies on knowing your location and working with the challenges it presents.

The case of Brazil provides a useful example. Culturally, Brazilians are perceived as friendly and dedicated, but when it comes to business, they’re not known to be as open and direct as business executives from other markets. Also, business approaches that may seem normal in some markets can come across as disrespectful to Brazilian business professionals. This situation becomes more critical at the middle management level because colleagues have less global exposure – they won’t necessarily have travelled widely to other locations or been involved in global decision-making (unlike more senior executives). As a consequence, it’s common to find situations in which people struggle to take part in constructive debate, which leads to ineffective leadership and a lack of trust, which may prevent team members from contributing to important conversations and lead colleagues to perceive the organization as hierarchical and unfairly demanding.

One case in Brazil demonstrates the challenges of expanding into a new market. A successful global food company moved into Brazil without sufficiently considering the challenges within this market. It hadn’t factored in the specifics of consumer habits, or evaluated the challenges posed by Brazil’s infrastructure and the tax differences that exist between each region of the country. These oversights cost the business dearly, ultimately impacting prices due to poorly understood logistical challenges within the market (such as goods being imported from the wrong port, and clearing customs in one area while holding inventory in another, making it difficult to optimize potential savings from tax benefits). In addition, although the company sold a premium product, it was too sophisticated for local consumers, who often didn’t have the financial means to purchase the product (a factor that also varied across regions).

Increased local insight could have saved this company a lot of time and money, and it may have helped the organization find a way to operate more efficiently in Brazil – in a way that met with the global business’s expectations of the local operation. But this is easier said than done, as finding an effective approach that works well in a new market while complementing the global strategy requires you to tread a fine line between embracing the new location wholeheartedly and operating within global budgets and strategic controls (which are also pivotal to business success).

 

Listening to every stakeholder, from senior managers to your customers and suppliers

Developing a thriving local business relies on more than diligently future-proofing your organization against local challenges. It’s also imperative to ‘listen to the local crowd’ both internally (your top and middle management executives) and externally (your customers, suppliers and distributors).

To be an effective leader, you need to listen to your team: the answers to many problems may be right in front of you waiting to be discovered. One interesting example comes to mind that demonstrates this perfectly. A salesperson at a large and well-admired consumer company was able to boost the organization’s sales by developing an in-depth understanding of the characteristics of the organization’s core client base. By understanding the differences between successful and unsuccessful clients, they found a way to survey their clients, identify the clients with potential, and dedicate their time to these clients. By evaluating client behavior, they found a formula for repeat sales.

External stakeholders can also offer valuable insights when expanding your business. In another example from Brazil, a large European chemical conglomerate with a small-to-medium-sized Brazilian business unit faced similar challenges to the food company. Although it was an uncontested leader in the market for most of its products, the Brazilian business unit had been underperforming, and it was losing market share to competitors faster than expected. With the help of a-connect, and through a detailed organizational assessment and series of workshops, the organization developed a clear vision of its global strategy, adapted it to the local business unit, and built consensus around the local business’s potential, enabling it to set ambitions and common goals for the organization. The parent company was able to foster a company-wide understanding of its vision and global strategy, and achieve the buy-in of the local business unit’s management team. The company reassessed the local market opportunity with the help of its external stakeholders (direct clients, distributors, end-users and so on) and determined a realistic approach to achieving business growth. The local business unit then redefined its distribution model, sales organization, and commercial processes and policies to suit the market. By listening to and better understanding their clients, the local business unit was able to craft a more effective go-to-market strategy.

This case highlights that although local leaders may feel they know the local market well, they may not know everything that matters to guarantee business success. By empowering local teams to listen to and understand the local market in all its intricacies, local business units can stay ahead of the game and ensure they’re aware of changing market conditions, the new product landscape and the ever-evolving economic situation.

Business success begins at your organization’s headquarters and goes all the way through to the salespeople who take your customers’ orders. You need the buy-in of everyone at every level of your global organization. Less is more: if local leaders understand their market – its idiosyncrasies and unique challenges – you’ll need less meeting time and fewer 50-page reports to guarantee a thriving business that every colleague contributes to. And that happens when they’re empowered to take control of their team, be accountable for their decisions, and share the rewards.

To find out more about how a-connect can help your business prepare for the challenges of achieving business success in a new location, contact us today.

Working Capital

Posted on January 30, 2017 - 12:00 am by

Working Capital is the key indicator for capital tied up in the company, equivalent to the sum of accounts receivable and inventory, minus accounts payable. Most companies focus on inventory management to control Working Capital levels, while accounts payable is often difficult to influence due to supplier pressure. However, significant potential for improvement lies within accounts receivable management, which is often neglected by companies. Key to success is the improvement of collections and dispute resolution cycles. To achieve this, I have developed an innovative and proven three-dimensional customer segmentation matrix approach that delivers significantly better results when targeting tied-up capital reduction.

 

Goals of improved Working Capital management

Working Capital represents tied-up capital and, therefore, financial risk, especially with regards to accounts receivable. A reduction of Working Capital has the potential to free up cash for investments and, at the same time, particularly for accounts receivable, minimizes the risk of bad debt and, eventually, costly write-offs. Moreover, when managed properly, it educates customers about committed and reliable payment behavior.

Sophisticated Working Capital management enhances detection and reduction of mismanagement in any of the underlying processes, and thereby increases profit margins. Working Capital improvement has three goals: firstly, to reduce accounts receivable to the lowest level possible, which is mainly determined by the standard payment terms of the industry; secondly, to manage stock at a maximum service level at minimum cost; and thirdly, to increase payment terms with suppliers to delay cash outflows. At the same time, it is critical to avoid damaging the company’s key performance indicators (KPIs), such as sales, while optimizing Working Capital.

We often encounter similar shortcomings in accounts receivable among our clients. These include the tendency to have numerous payment terms in use, even multiple terms for the same customer. Poor communication between Headquarter and Business Unit is another common problem. Also, companies often have unnecessary and expensive credit insurances in place and fail to formalize level settings and authorization while setting initial credit limits – mostly for new customers. Companies often lavishly allow high levels of overdue debt and do not have days of sales outstanding (DSO) targeting linked to cash targeting. Ownership of key processes is often unclear or disputes are predominately solved by issuing a credit note – a very costly procedure, which can consume the entire profit margin. Overall, key process managers often do not measure or do not know current DSO and best possible DSO (BPDSO) levels.

Optimization tool and methodology for accounts receivable

Related to these shortcomings, some companies attempt to address these issues with a two-dimensional customer segmentation process. However, the majority of these companies fail to include the right analyses and metrics and, therefore, do not realize the benefit from this process. The better approach is demonstrated by the enhanced customer segmentation cube that I developed. The cube includes three dimensions: average overdue, customer size and customer’s strategic importance.

Figure 1: Illustrative cube for customer segmentation, selecting high-impact customers

 

Segmenting customers by a third dimension makes the process more sensitive for identifying ‘bad payers’ who offer the highest potential for freeing locked-up cash. The customer segmentation cube permits the development and application of highly differentiated collection strategies, individually tailored to each group of customers. If applicable, further customer segmentation categories can be added.

Methods for reducing DSO

Accounts receivable improvement requires cross-functional commitment and continuous communication to achieve sustainable change, including: new customer set up, sales and contract management, risk management, order processing and billing, cash targeting and collection management, cash allocation, and dispute and deduction management.

More specifically, methods primarily applied to reduce disputed DSO include sophisticated customer segmentation, state-of-the-art dispute management (including a proactivity approach) and a root cause analysis with cause elimination. Methods to decrease ‘allocation’, ‘past due’ and ‘within tolerance’ DSO limits include account cleaning, contract management and a sophisticated collection process management accompanied by the right set of tools and metrics. Finally, a standardization of payment terms can be applied to reduce DSO in all new contracts. Therefore, DSO can be significantly reduced, with overdues often cut in half in the short to medium term, to deliver substantial benefits.

Figure 2: Example of DSO before and after the professional reduction project

Measuring success for accounts receivable

DSO as a KPI is an important metric to measure the success of an accounts receivable improvement project and to prove its independence from sales. Statistically, about one third of DSO improvements result from payment term standardization and about two thirds from improved collection strategies.

To ensure a smooth transition to new processes and methodologies, improvement projects need to be well prepared and professionally implemented. Miscommunication with customers and incomplete or disjointed implementations can jeopardize customer relationships and put sales performance at risk. Bearing in mind that businesses are highly diverse, every company requires a specially tailored and customized approach to Working Capital optimization. ‘Off the shelf’ solutions are a dangerous undertaking.

Figure 3: Example of DSO development before and after the consultancy project

Conclusion

Working Capital projects are critical for unfreezing cash, which allows companies to address their most urgent needs, such as making investments, guaranteeing production flow, improving customer satisfaction, managing bad debt and avoiding major write-offs. The latter is becoming more and more important in a globalized business environment, particularly in times of crisis and increasing numbers of customer bankruptcies.

The best starting point is yet again accounts receivable management, which frees up cash relatively quickly. Nonetheless, a simultaneous accounts payable and inventory improvement project is recommended to improve both supplier management and production flow.

My experience is that only a holistic approach covering all three Working Capital-related areas can unveil the complete list of a client’s shortcomings, often linked to each other. As mentioned, these shortcomings, and the excessive issuing of credit notes, can cause significant losses and, hence, a reduction of the company’s overall profitability.

Building an agile organization

Posted on October 30, 2017 - 12:00 am by

Many companies that are facing disruptive competition and new, often digitalized business models are reassessing their organizational structure, but not by reshuffling the org chart and moving lines and boxes; rather, organizations are seeking to build the capacity for continuous change into their very setup.

We are experiencing a renaissance of organizational design as a management discipline. Organizations large and small are engaging in organizational experiments. New models are emerging, and being refined and adopted – be they self-management models like Holacracy, the responsive org movement, network organizations, or tribes and squads. The motivation to experiment with new forms is driven by insight that the classic step-change model of reorganization – i.e. where a new overall structure is defined from the top down and implemented through a protracted process, and then repeated – is too slow and inconsequential for many incumbent players in challenged markets.

Take German carmaker Daimler AG. A technological leader in its field, the company is now challenged by at least three major shifts in the car market: 1) digitalization and platform-based disruptions (UBER); 2) automation and driverless cars (Google and Apple); and 3) electrification (Tesla). In the future, fleets may consist of self-driving, electric vehicles and, as such, Daimler AG may only be a fraction of the size it is today – challenging key dimensions of its as-yet superior value proposition. Daimler AG’s CEO, Dieter Zetsche, directly quotes such developments when justifying one of the biggest transformation efforts in the organization’s history – which will see a move toward a network organization, simplified decision-making and more flexible budgeting approaches.

While not all new organization models are radically new, three trends stand out for managers exploring a new approach: 1) a new understanding of hierarchy; 2) a new balance of centralization vs decentralization; and 3) a transformation toward a new setup.

  • A new understanding of hierarchy

The speed of change in the market is drastically reducing the half-life of experience and competence, calling for new models of leadership. Many new approaches challenge traditional organizational hierarchies, and propose shared and shifting leadership and the distribution of classical leadership roles.

In discarding hard-coded hierarchies, new models throw out one of the oldest coordination mechanisms of large-scale organizations: the fact that bosses used to be put in place based on their superior qualification (experience and competence) and their ability to coordinate work across units and functions. In today’s insecure, rapidly changing context, such superior qualification is hard to obtain. Consider a senior manager in a company heavily affected by digitalization saying, in private, that his organization’s executive board frequently has to make decisions that it barely understands the implications of.

As such, new forms of organization change the role of leadership. The classic org chart (even the two-dimensional matrix version of it) calls for a fully integrated leader–manager role that acts as the connection between units, functions and layers. Prime examples of agile organization take this integrated role apart – Holacracy differentiates between the rep link, lead link, facilitator and secretary; and Spotify’s tribes and squads have the task owner, chapter lead, tribe lead and agile coach – each of which has distinct remits and accountabilities. The differentiation of leadership roles, if set up in the right way, allows teams to self-direct their focus on value creation, without being slowed down by constant alignment with higher levels of the hierarchy.

  • A new balance of centralization vs decentralization

Digital transformation can put paradoxical demands on your organization design agenda. Faced with digitalization, large incumbent companies are often forced to centralize and decentralize at the same time.

Org design and novel forms of decentralized setups generally involve integration, common platforms and shared frameworks. This applies to management systems, support functions, policies and regulatory non-negotiables.

The build-up of digital capabilities may involve building a global business platform; it will also require market-based innovation activities, especially if the nature of the products implies market- or segment-specific customization. The organization pushes simultaneously for centralization and decentralization. Building common platforms and data models is a topic of centralization; the question is how should platforms be integrated at the point of cross-functional teams? Teams may share features of the joint platform and data model, enabling them to leverage central development work and standards while achieving customer-centric innovation. A case in point is a sales force: in a non-digital model, it would focus on selling a pre-defined product; it now needs to bring customer relationships and insights to product innovation workshops.

New forms of organization are about striking this balance: building scale through shared centralized frameworks while leveraging assets adaptably through dispersed development or delivery teams.

  • A transformation toward a new setup

The objectives of agile organization are widely shared, but the nature and context of value creation are important. There is a huge difference between giving task autonomy to the smallest unit at an assembly line, busting organizational silos for task-focused collaboration in what Stanley McChrystal calls a “team of teams”, and integrating digital capabilities with business functions. Such factors can be used to explore parallel logic to identify common denominators.

Creating an agile setup across an organization requires building a model that fits the unique market conditions, strategic challenges and context of an organization. Existing models are important sources of inspiration and learning; no dominant new paradigm has yet emerged.

Learning new forms of organization can be supported by running experiments within select teams and divisions – not switching suddenly to a new ‘all in’ model.

Such experiments should conform to four conditions:

  • They should leverage the self-selection of individual leaders willing to spearhead efforts in their teams.
  • They should manage interfaces with the rest of the organization, avoiding culture clashes, and frictions in information flow and decision-making.
  • They should ensure structured attendance and support to capture learnings and scale best practices.
  • They should benefit from substantial top management support, based on a shared understanding of the organization’s purpose and value creation.

You can find more information on how to approach the transformation toward an agile organization here.

Lean Maintenance: A Practical, Step-By-Step Guide for Increasing Efficiency

Posted on May 30, 2018 - 12:00 am by

The idea for Lean Maintenance: A Practical, Step-By-Step Guide for Increasing Efficiency came to us after years of conducting improvement projects in factories. These projects typically included a ‘production’ and ‘maintenance’ workstream, with the maintenance workstream covering productivity improvement, backlog management and organizational effectiveness. We always used Lean principles in our projects to achieve results, and, during the projects, we regularly noticed that people in the maintenance departments had little or no exposure to Lean manufacturing methods. So, one afternoon, we asked ourselves, “Wouldn’t it be nice if there were a hands-on book, written in down-to-earth language, that explained how to apply Lean principles to maintenance?” We did some research and found that, while there were many books about implementing Lean manufacturing principles in different business processes, there were not many that showed how to apply them to industrial – or plant – maintenance.

We realized that the maintenance work carried out every day in factories around the world is typically inefficient – at least from a Lean perspective. Time is wasted, different tasks are not properly coordinated, job durations are overestimated, and job plans (when they exist) are ‘inflated’ to cover up the inefficiency. In addition, an ever-growing maintenance backlog makes people believe they need more resources, while inefficient processes use up those scarce resources. To top it off, maintenance seems to be a ‘black box’. Although some key performance indicators (KPIs) exist, they typically only track the maintenance budget, and there is no systematic way to track the efficiency and effectiveness of the maintenance process.

Maintenance tends to be an area that is forgotten about when it comes to efficiency within industrial companies, as many of the improvements are carried out within the (literally) productive areas of the factories. When companies set out to improve maintenance, they typically do this through budget cuts. If the budget for maintenance is reduced significantly, this can reduce the reliability of the assets.

This book aims to provide maintenance managers and practitioners with the Lean tools and methods they need to quickly improve efficiency.

We show the reader how to:

  • Get more work done with the same number of resources, or fewer (helping you save money)
  • Improve the working atmosphere by simplifying work
  • Improve communication between production and maintenance
  • Introduce tools to measure performance
  • Get started with improvement: it is a pragmatic, step-by-step process
  • Achieve results in a matter of weeks, without monetary investments

The book is written like a workbook (hence the words ‘step-by-step guide’ in the title) that is to be used when conducting an improvement program. It has the following structure:

  • We introduce the concepts of Lean and their application to maintenance, before describing how the ideal Lean maintenance process covers the following six steps: (1) writing good maintenance notifications; (2) selecting and prioritizing work; (3) planning; (4) scheduling; (5) executing jobs productively; and (6) providing feedback and managing performance. The productive job execution chapter introduces ‘wrench time’ and two measurement methods – activity sampling and detailed observation.
  • We show the reader how to conduct a facts-based diagnosis of their maintenance process. The diagnosis covers both analytical work and shop floor observations.
  • Important topics for planning the improvement program are covered – e.g. developing a communication plan and involving the workers’ council.
  • Across six chapters, we outline how to improve each of the six steps of the ideal maintenance process.
  • In the final chapter, we discuss sustaining the results.
  • In the appendix, we provide a detailed description of selected Lean tools for maintenance, covering what it is, when to use it, how to use it, and dos and don’ts.

If you’re thinking “Why should I buy this book over others?”, then here are just a few reasons:

  • Reading our practical book is like going through a case study of improvement for your own business, with exercises and pragmatic, results-oriented improvement steps.
  • You can immediately start applying the concepts and get results in a matter of weeks. No monetary investments are needed, and no new IT systems are required.
  • The book uses conversational, down-to-earth language, so it’s designed to be as clear as possible. We wanted it to be like receiving expert advice from a friend. We have made a special effort to present the concepts in the simplest and most effective way to engage you and get you started with the improvement journey straight away.

The book is available in hardback, paperback and Kindle formats on amazon here.