Culture creates Technology Led Change

DIGITAL TRANSFORMATION? DON’T FORGET THE CULTURE!

EFFECTIVE COST MANAGEMENT CULTURE [ECMC] AND TECHNOLOGY LED CHANGE:

Abstract: all sectors in the economy are chasing change at a radical pace, they are also suffering from the fear of losing out. Since the Great Recession finance has been exploring how to make itself relevant to its customers again. Covid came along before that renewal got any real traction and has compounded the position for finance. Covid has also dragged all sectors into a vortex of rapid digitalisation; often just to keep up with peers. UK is not seeing the level of investment needed to support the wider economy. Investors have a global outlook and that means ‘local’ may miss out. For different reasons, UK is not as attractive as the rest of the world. Is this technology or is it something broader and deeper?

Technology requires more!

There are no technology businesses and non-technology businesses. All businesses have technologies. Most businesses use energy, this does not make them energy companies. Some are procured and commoditised but the business process in which they sit is unique to each organisation. What is unique is the details of the configuration but mostly how the process is operated and managed.

The challenge at present is the leading edge of the technology curve in your sector and your position relative to that. We are all followers in many respects as we cannot be master of all. Even unique product innovators such as Tesla with its battery technology. As a producer of automobiles, it has been less a leader and more of a follower. Volkswagen has already positioned itself to directly challenge Tesla as a mass produce of consumer ready EV products. ID 3 is already launched, and ID 4 is just announced for launch late 2020.

When it comes to it VW will focus on a good product at a good price and Tesla is a leading technology at a high price. ECMC says Tesla will have to learn fast how to produce in ‘smart commodity’ fashion if there is a segment in which VW has a technically competitive vehicle. VW is already mapping out a supply chain with access to its core EV chassis design. The challenge is can Tesla scale as well as VW? Does Tesla have the ECMC profile needed to match a mature automaker with global reach.

Tech business leaders recognise that they can succeed with new operating models based on competences that are a blend of technical and human skills. That configuration is driven by a recognition of enhanced value from revised business models partnering with customer and networks of expertise.

Finance in the cloud!

Finance as a sector is being bombarded with new cloud-based technology and alliances with FinTechs and BigTech that will introduce new cultures in addition to technology platforms. The business model of banks is now challenged with open banking and value added is much more in view. If a financial service is not clearly a value added offering it will struggle due to competition from challengers, to reduce unit costs via cloud-based platforms. The old rent seeking model [charging you fees for looking after your money] of banks is challenged. ECMC suggests banks as ‘old finance’ like all financial institutions must demonstrate a more effective cost management performance indicating a value for money service.

Open banking is now growing fast in the UK [2 million users, 160,000 per month added] and control over data entities for customers moves to the private individual. This will introduce transparency and more competition in the payments space. A financial business that cannot rely on a culture of effective management of costs is going to struggle in competition with apps and challenger banks adopting open banking as the default operating model. It has been estimated that open banking allows challenger banks to have a customer ‘cost of acquisition’ of $1-38 while established incumbents have a $200 unit cost [James Norrington, Investors Chronicle 2-8 Oct 2020].

Central Bank Digital Currencies are now a mainstream subject discussed and being developed by Central Banks. While they may not displace money entirely, as some suggest, they will disrupt the payments industry. CBDC’s have been discussed extensively at SIBOS 2020 placing them in the forefront of the digitalisation agenda. In theory CBDC’s play into the conceptual thinking behind blockchains and create in effect a spreadsheet-based transaction disintermediated world of consumers / businesses as decentralised exchange partners. the potential for disruption is immense. It is questionable that without this digital format a central bank is open to competition from whatever emerges from the cryptocurrency laboratory. Do we need a bank or a secure spreadsheet?

Health and Care is a case in point.

HealthTechs are similarly offering to alter the way resource strapped public health and social care is provided and that could be a good thing. Mature health sectors are burdened with large overheads which add little if any value. Their function is control which is of no value to the end user at the point of service delivery. There are estimates of 25-50% cost opportunity for some applications. Combined with new models of care based around more active patients Resources for Human Development [www.rhd.org] has reduced demand by 50%+ for many of its service user cohorts. Thus, their local teams have reduced the demand profile for their patients.

Curam [www.Curamcare.com] in UK offers a radical way of providing and procuring domiciliary service for clients at less unit cost and they offer their carers 25% net-premium over the average PAYE carer in the sector. Core to that model is a belief in low overhead using technology and effective processes to support carers and clients. In addition, Curam promote a Self Managed Model of Care to build up a competence with the client and client facing carer to commission, procure and provide human centred care nearest to need and home. The SMMC reflects the need to alter the way of seeing and acting within this sector in order to shift away from a purely producer mindset and to maximise value in the hands of the client.

RHD and Curam combine new ways of organising plus a cloud-based technology platform to alter the performance and the experience of the service for both patient and primary practitioner. In both cases the culture and the business model are as significant if not more so than the technology. However, the technology catalyses the culture. These are small projects but offer major innovative impacts on a mature sector in need of a complete rethink.

The NHS is spending £250m on AI development projects in partnership with multiple alternative HealthTechs and wearables companies. They are operating within a producer led industry but will inevitably reach what banks have in the fact of technology enabled control for the customer. Curam represents a technology led enabler of self-management; RHD is a not for profit organisation. Both are organisation models with no hierarchy and organised around local self-managing carers or teams of practitioners, focused on local clients.

According to Digital Leadership “we are now engaging with HealthTech to improve patient outcomes, drive efficiency and medical breakthroughs. With smartphone cameras being heart rate monitors, and contact lenses measuring blood sugar levels we are moving into an era we can all collect physiological data about ourselves” [https://digileaders.com/topic/health/].

Irrespective of the exact technology formats and capabilities what is evident is the overhead that controls data is being replaced by algorithms and analytics that enable a flatter networked organisation based on high competence along the patient pathway.

Like open finance an ‘open healthcare’ sector could threaten the business models of core health provision. Like the finance sector the core and matured health sector is riven with overhead. In most cases sponsored or managed by the state. Nevertheless, these sectors are dominated by policy, delay, high cost pharmaceuticals and poor patient/client experiences. When the neo-classical view of public finance is added then the recipe is one for disruption as there are not the appetites to fund the mature model of business. Business models must envisage and engender new systems, management and culture.

All of these businesses are lost without the semi-conductor sector which is thriving at present. Semi-conductors sector is not new but a long established one; evolving the power to process data and to enable the cloud, [along with other input technologies]. Like any mature sector semiconductors is no longer simply about Intel. There are many new players focused on targeted sectors such as self-driving automobiles. Despite Intel’s dominance new players have developed niche capabilities to carve out significant revenues.

Is Amazon a retailer, a media player, or a technology player as it has large footprints in all of these sectors. ECMC suggests organisations with effective management systems, value added cultures and matching behaviours are those that innovate and stimulate innovation. They are therefore like Amazon or semi-conductors able to take advantage of the Covid-19 shock. In the UK it took 10 years for online retailing to shift from 10 to 20% of total sales. In 10 weeks during Covid it has gone to 30%. How much of business activity is in the cloud following the Covid shock? Why would it revert to the old ‘real’ world? ECMC businesses do not revert because it is their culture to innovate.

ECMC based organisation:

The examples referred above are in early stage mode like the initiatives that would have been seen in the move towards the ‘factory’ in the Industrial Revolution. These initiatives will grow and collect partners, competence via experience and learning. Historical analysis allows us a synthesis to offer insights and explanations. It also misleads us into the idea that grand change models and policy created this change when in fact it occurred in random and distributed ways across all sectors and geographies.

Like evolution change is happening on a constant basis at the micro-level. There is a macro-context which is itself part of a feedback loop. However, as we can see with the UK Chancellor, he is trying to work out what is required at the micro-level. That is the value of the macro, to offer stimulus to the micro.

The ECMC organisation is one that embeds across the network and at all layers, conscious forecasting of the business goal and utilises effective planning to deliver that forecast.The actual performance is used to educate the operating model to learn if the forecast was on target, if the assumptions of the forecast are changed and if the operation is underperforming to achieve its standards.

Today the algorithm offers the instant real time tracking at granular detail to enable front line teams to align with forecasted [business plan] standards. Variance management is the task of team leaders to understand and correct to recover or to offer new standards if there is misalignment.

With non-ECMC’s there is

• no or a reactive management system

• no or a shallow culture of cost awareness

• the behaviour to follow up on the plan is too late,

• feedback happens when there is a failure of significance

Significance is usually first / next quarter losses, loss of major customers to competition, non-fulfilment of orders or a shock such as Covid-19.

There is no Santa Claus!

Businesses at present are sitting on their hands hoping for the macro-winds of change to blow and bring their boats up in the rising tide. ECMC suggests these boats are carrying unnecessary cargo. Like evolution the ECMC business will evolve as a species because it is fit for purpose. It has used technology to strengthen its management and culture not as a substitute for them.Evolution suggests that nature learns, in the form of microbes [microorganisms, germs, protozoans, bugs and bacteria] and develops strategies to expand the life opportunities for itself. ECMC suggests that businesses that are aware at all levels of their competence in cost competitive terms are going to evolve into stronger businesses with flexible configurations and evolving processes that reflect the dynamics of their customers.

Investment in ECMC v non-ECMC

Is UK an effective cost management culture? Is it in position to attract investment and play its part in global transformation of all sectors enabled by rapid adoption of cloud 1st digital strategies?

Performance of the UK All Companies sector vs IA Global sector in the year to October 2020

The UK is positioned to experience major reconfiguration both as an investment space and within its real economy. Is legacy culture restraining the UK as a business culture to adopt new business models? It appears for some time UK has been receiving a lower share of the flow of investment funds. As the graph shows that while Covid may have accentuated the problem, this is not a recent issue.

Finance another case in point

A major energy current in all major economies is the transformation of all sectors via the shift to cloud-based platforms and the application of algorithms to as many tasks as possible. As I have argued this is particularly evident in financial services.

The Covid pandemic has been used to explain the disruption rather than a lack of competitiveness in financial services and other areas, such as retail, however as has been clear for some time banks, retailers have been under severe pressure and their attraction as investment targets has fallen over many years as the graphs below show for some iconic finance brands.

The Transparency Task Force is a body aiming to “accelerate the rebuilding of trust and confidence in financial services”. TTF clearly attaches hope for recovery of the post GFC and other scandals within the sector, to the rise of the FinTech sector. Thus, TTF recognises the underlying underperformance within the sector that indicates poor control and excess charges if not gouging. ECMC suggests the challenge for finance is a core one to develop within and throughout organisations a management system and culture of transparent cost management. Without that the basis of performance is speculative. In the Phoenix Change Management Surveys [1 & 2] [ www.phoenixcml.com ] FinServ respondent scores are high and higher on the need for culture change within their organisations. ECMC suggest financial services is a poorly managed sector dependent on complexity of product, high overhead to manage failure demand and passivity on the part of consumers.

If as a citizen/ customer you have engaged with banks and insurance companies, you will be aware of the bureaucracy that confronts you. A once great industry is beset by overhead and no real idea about true value. The ability to manage cost is transposed into fees, charges, and penalties to export overhead and unsupported transactional cost to customers. The scale of failure demand is estimated at 50% and above. Customers know from the time they spend on their chats/ calls and emails with banks and insurance companies, that they must be paying for waste.

Alliances with FinTech will introduce new business models or Fintech’s will find they are investing in ‘zombie’ companies kept afloat by BoE and the Treasury and not be effective managers of cost. Technically zombie companies are a smaller sub-set, 10-15% in Europe / USA according Bank of International Settlements. But this is a legal definition and banks are unquestionably favoured in the economic management of the economy. Without bailouts in 2008 there would have been reduced balance sheets and real zombie companies perhaps. Underlying the sector is the culture of management that has yet to shake off the rentier model of banking / insurance.

Finance was once the liberator of new innovators in the early capitalist era of local markets; the 16th-18th centuries in Europe. This was the finance that supported the rise of capitalism. Todays 21st century seems to support bureaucracy and monopoly. Todays’ finance supplies a decreasing amount of capital to the real economy. Most lending is between financial actors or to poorly equipped consumers.

ECMC suggests financial services as a sector cannot make the transition to a more trustworthy and effective business without a major reset of their management cultures. ECMC suggests cultures reflect the core business and operating models. Therefore, there must be a system of processes and behaviours deigned for transparent and direct management of value and cost.

Not just finance!

Infrastructure companies, road, rail, air plus telecoms are sectors with major bulwarks against threats to revenues, at present. Road and rail infrastructure in the UK are secured by regulated 5-year ‘regulatory cycles’, investment / funding cycles offering long term horizons and opportunities to recover short-term volatility impacts from redirection of funds. The UK treasury plays a major role in controlling cashflow and spend therefore in road and rail infrastructure leading to lags in decision making and leaning on under-employed capacity. Large capital and maintenance contracts can hide the short-term dynamics of inconsistent forecasting, planning and implementation.

Investment in road infrastructure has been underfunded for 10+ years in the UK and now an almighty rush to invest in ‘smart motorways’ [subject to review for health a safety issues] and ‘Kent corridor’ in relation to Brexit. HS2 is pulsing away despite questions over movement related to work, north south effects versus cross regional linkage effects in terms of value added. Infrastructure investment and therefore contracts let for development and maintenance, have suffered from being detached from strategy that bears relation to the needs of networks v the politics of investment in constituencies. Crossrail appears to be a great idea and eventually a great reality, albeit late.

Airport capacity has been managed in the same way, as a political decision not a strategic investment in capacity to add value. Capacity arguments demand a new runway[s] for London/ South East. Alternatively, if environmental concerns were an accepted but unwanted risk, where is the non-air travel strategy? Investment in infrastructure is as in the post war era generally, too often an investment in totemic glory. ECMC says this is a gravy train but also a fattening diet that will leave the operating business unable to see the wood of ‘lack of control and passive culture’ for the trees of ‘secure funds and political expediency’.

The level of air-travel has been down to 20% and has been estimated at up to 40% in later summer as restrictions were relaxed. With a second wave now in full flow Heathrow is reporting 18% of year on year traffic last month, with expectations that will remain low / drop further in short term as the new restrictions kick in. Thus, those very large businesses in that supply chain are carrying huge overhang costs and if not supported by the state are exposed as insolvent. The level of overhead some will be carrying also highlights not simply the scale of cost overhang, but also the underlying ineffectiveness in managing cost. Many of these businesses have been operating without thousands of office-based staff now on furlough and ‘doing nothing’. This has made little or no difference to their operation. The ‘getting back to normal’ push carries the danger that there is no assessment of the true cost to perform ‘useful work’ that adds value.

ECMC suggests a business that does not effectively manage its costs at granular level cannot shift its cost base easily in the present circumstances and must either cut a percentage based on an accountants calculations, but without operational logic and return to a ‘normal’ operation or simply ‘return to normal’.

Asset managers tend to have pressure to maintain uptime and other related service level agreements [SLA’s]. In road, rail, and air travel this is not evident. There are compensation regimes but again these are political and mainly driven by EU regulations. Road, rail, and air passengers would not recognise an effective SLA regime in place that effects a performance discipline. Instead there is a failure management culture that regulates customer communications, compensation payments if necessary and PR for message management. All of that is overhead. ECMC says a transparent business does not invest in non-performing assets. Asset management is dominated by bonds at present and that means BoE and Government. There is no limit to that scope as the rationale behind that dynamic is not effective investment but political investment in reputation. Over prolonged periods managers learn about task completion, deadlines and reporting milestone completions and risks. This is not a basis for effective management of cost.

ECMC and Futures

The Institute of Directors in UK reports 74% of 1000 respondents saying, ‘homeworking is here to stay’, there is no going back to conventional workplace-based configurations. On same day [5th October 2020] Cineworld announced 30,000 jobs to go as cinemas to be shut; and DPD announced 20,000 new jobs as online orders expanded. There is hope and there is certainty of change. ECMC as a business culture assumes change it does not wait for change.

Technology is core to all businesses; every employee is technology loaded and most are tech ready with apps and awareness of the cloud as the embedded world of interactions and transactions. That will only develop as an intuitive sphere of experience and operation.

ECMC proposes that the management system and the management culture differentiate the set-up, the operation and the adaptability of the organisation to its environment. In the set-up you need to assume zero waste and 100% automation. ECMC implements what works in the customer segment; thus, if human interaction is needed it is because it is a value adding interaction. The non-ECMC organisation assume overhead, operational waste and failure demand.

In the ECMC organisation everyone shares awareness and mastery of core processes and tools to manage the creation and development of value for the end user. It is no longer feasible for a few managers to monopolise knowledge and control.

The old adage of ‘the right person doing the right thing at the right time’ is still true. Today however it is a shared world, a networked world. It is not a simple hierarchical command and control world. Expand the capacity and capability of your colleagues to manage cost as an intuitive skill.

ECMC is a method of operating and a culture of practice that enables the organisation to perform to its maximum and to know when it needs to make a step change due to external shock or breakthrough competition.