lower your cost income ratio in the digital age - pwc · 16-6-2015...

$: Lower your cost income ratio in the Digital age - PwC · 16-6-2015 C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx All ‘commodity’ businesses face$
18 June 2015Amsterdam

Lower your cost income ratio in the Digital age

Operation find the money

Ken van Ierlant

Advisory

PwC

18 June 2015

16-6-2015 C:\Users\Kierlant002\AppData\Local\Temp\notes7C2EA6\Presentatie treasurers.pptx

All ‘commodity’ businesses face the challenge of increasing C/I ratios…ING experienced a strong incline in their cost/income ratio in 2012. Mr. Hommen CEO said 60% of our clients has gone mobile in 6 months leaving € 1,5 billion in investments idle

63,40%

75,70%

40%

45%

50%

55%

60%

65%

70%

75%

80%

4Q11 1Q12 2Q12 3Q12 4Q12

Underlying cost/income ratio (in %)

Cost/income ratio excl.market impacts & CVA/DVA

Cost/income ratio

2

Digital Transformation •

PwC

18 June 2015


... 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

Time

Today

Capex

Cost base

Revenue base

Cash flow

Company X manages a Legacy profit pool

A classic transformation program is announced,

absorbing cash and resources

Disruptive market change

occurs

... but financing capacity to fund the transformation is limited or

absent

Price increases help boost short term profits ...

... while efficiency measures drive under-investment in the business ...

So the legacy profit pool evaporates rapidly and

financial distress is close ...

3


PwC

18 June 2015


While more and more businesses are experiencing disruptive market changes, creating the need to move to an agile E2E operating model, @ lean & flexible cost structures ...

Traditional operating models have high fixed costs and are asset heavy

New operating models are agile, and geared towards rapid adaptation ...

Operating model

Revenues

Cost structure

Assets

Transaction based

Transaction based

Subscription based

High fixed costs

Flexible costs Flexible costs

HeavyTangibles

Intangibles Poor

Light

Rich (data!)

Averse

Rich (data!)

Customer proposition

Purchase &Ownership

PurchaseOwn / Rent

Subscription &Usage “as a service”

“Ownership” “Usage”

DisruptionDisruptiondisrupts the

disruptor

4


Case study

PwC

18 June 2015


... 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

5


• Supply-based value proposition

• Linear customer journeys

• Limited range revenue models

• Static pricing & rebate structures

1

• Static /siloed digital presence

• Scattered landscape of legacy IT

• Siloed (customer) databases

• Capexed and outsourced IT

• Siloed operating model

• Classical E2E supply chain

• Diverse functional departments

• Capex & working capital rich

3

2

Revenues

Costs

Capital base

C/I ratio

RoIC

Customer Experience

Target Operating

Model

Enabling technology

Traditional business response has a negative effect on the C/I ratio and RoIC

Source: PwC analysis, Forrester Research

Medium and long term effects

The risk of data breaches increases as well as the financial and reputational impact

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.

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: PwC analysis, IBM cost of data breach study

PwC

18 June 2015


Integrated customer journey designCustomer lifetime management

Data analytics & machine learningProduct development / R&D

“Vertical” (industry specific) SaaS

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

New operating models are agile, and geared towards rapid adaptation ...

Operating model

Sto

re

Co

nta

ct c

ente

r

Web

Ap

p

Siloed functional departments

Siloed IT on premise (=capex!)

Sales & marketing organized per

channel

Market / Customer

Master data managementIaaS / PaaS

ERP as a service

CRM as a service

Sto

re

We

b

Ap

p

Cu

sto

me

r c

on

tac

t c

en

ter

Fu

nct

ion

al

dep

art

men

ts

Homogenous UX(physical + online)

across channels

KPI’s aligned across channel

Opex lean & capexaverse!

KPI”s per channel

6


PwC

18 June 2015


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…

Long term customer value chain

Finance

CustomersMarket strategy

Business model

PeopleTechnology/

ITOperating

model

Digital transformation

7


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

Pr

od

uc

t m

ar

gin

Products

High profitability

products

Low profitability

products

Negative

profitability products

Products with a negative

margin, even when taking into

account their cross-sell impact

Products

Products with negative margins

could drive sales in other

products

Pr

od

uc

t m

ar

gin

PwC

18 June 2015


... 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

From siloed IT legacy…. .... to adoption of IT “as a Service”

Time

Co

mp

lex

ity

Big Data

Social Media

• Static / siloed digital presence


• Siloed customer databases


• Much shadow IT

• 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

Enabling Technology

8


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

SaaS

PaaS

IaaS

Apps

PwC

18 June 2015


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

9


Build an extra layer on the current IT infrastructure (High Capex and Opex)

Take the IT engine in the cloud end-to-end: Capex-reverse and pay-per-use

(No Capex, Low linear Opex)

Illustration of expansion of legacy IT systems over time

Time

Co

mp

lex

ity

Legacy IT systems hamper future growth as…

…concerns on compliance to regulations are increasingly present

…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

…limited functionality limits innovation and growth as lack of agility makes it impossible to meet demands of tomorrow’s client

Proprietary IT Cloud computing

- 80%

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) Non-IT

IT

Illustration of cost reduction by taking the IT in the cloud

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

FR

OM

TO

High Capex, High Opex

No Capex, Low Opex

Take the IT engine in the cloud: Capex-reverseand pay-per-use

This results in a lower C/I ratio

SaaS

PaaS

IaaS

Apps

Redesign the on premise spaghetti to linguini in the cloud (High Opex)

…different vendors need to be checked with respect to compliance

…these systems still need tailored solutions to connect infrastructures of different vendors

…implementation and maintenance costs remain high, not reducing the cost base significantly

…limited functionality across vendors limits innovation and growth

SaaS

PaaS

IaaS

Apps

Implementing point solutions in the cloud does not lead to significant cost reduction and enhanced functionality as …

Illustration of taking IT infrastructure in the cloud with point solutions

PwC

18 June 2015


So: the digital transformation goes beyond “digitizing the off-line business” and aims at enabling an accelerated business transformation along a profitable growth pathDT: Top-line driven – lean & flexible cost structures – capex averse

Traditional business The 4.0 digital enterpriseThe

Business case

• Supply-based value proposition

• Linear customer journeys

• Limited range of revenue models

• Static pricing & rebate structures

• Predetermined product packages

• Siloed operating model

• Classical E2E supply chain

• Diverse functional departments

• Majority of processes are generic

• Capex & working capital rich

• Static /siloed digital presence


• Siloed (customer) databases


• Much shadow IT

• “Outcome” driven customer proposition

• Interactive UX & customer journeys

• Integrated on/off-line user experience

• Adaptive & blended revenue models

• Real-time pricing & comparison

• Integrated operating model

• Closed loop marketing, PD and R&D

• Agile product development

• Processes customer delivery oriented

• Capex averse / reduced working capital

• Master customer data model

• Real-time analytics & data mining

• Straight-through transaction processing

• Opex-driven IAAS/PAAS-based front- and back office technology architecture

Revenues

Cost

Capital base

C/I ratio

RoIC

1

2

3

Customer experience

Operating model

Enabling technology

10


PwC

18 June 2015


DVCT aims at re-imagining & transforming business along a profitable pathLessons learned: one needs to start earlier then one thinks is needed

Time

Today ??

Capex

Cost base

Revenue base

Cash flow

Program reduces costs by significant change of

operating model

Managed migration of revenue base

Operating model is capex averse

Protecting theprofit pool

Digital is a disruptorBusiness

re-imagined!

Digitization as a source of innovation and sustainable business transformation

1 2

3

4

11


Medium and long term effect: Higher revenue base, lower costs and

asset light.

Transition period (short term effects)

Business 4.0

PwC

18 June 2015


The 4.0 digital enterprise transformation will create two types of firms; Capex and Opex firms

Balance

Tangible fixed assets +++ Equity

Trade receivablesdepends on quality of clients

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

12


Capex organisationInvests in tangible assets with a recurring business

model in co-creation with the client

Opex organisationNo investment in tangible assets with a transactional

business model, customer journey driven

Balance

Tangible fixed assets - - Equity

Trade receivables Suppose no impactLong term liabilities

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 - -“Fixed depreciation, changes

to flexible other costs”

Other costs + +

(Opex costs)

Net result ++

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.

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.

PwC

18 June 2015


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?

13


Good data management creates a large DIA and value…

813

40

90

Facebook Uber LinkedinAirbnb

Estimated net value of data-driven companies in billion USD

Source: PwC analysis

…the digital transformation, moving Capex to Opex and pay-per-use enables proper data management creating

value and a high DIA

How much will your DIA be worth?

lower your cost income ratio in the digital age - pwc · 16-6-2015...

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