Competitive advantage in today’s economic climate
Working with various emerging and established mid-tier companies on strategic growth and exit strategies, I focus primarily on creating shareholder wealth by using the company as the vehicle. An effective IT strategy is a critical way to ensure competitive advantage. But this is very difficult when you don’t have the relevant business insight, and often companies have very little understanding of how they are performing against the competition, other than from a top line view of sales figures.The initial barriers to a successful growth strategy often start with basics of having enough information and an understanding of three key criteria:
- What is the business actually selling,
- Who is their target client and
- Why the client will buy from them as opposed to the competition.
The simplicity of financial reporting
When first meeting a new company, I question many aspects of the whole operation, but the financials are always the starting point. Even before carrying out the exercise of due diligence, I always ask for the following:
- Three years of statutory accounts
- Detailed profit and loss
- Management accounts – P&L, balance sheet, cashflow
- Forecasts – P&L and cashflow
- Turnover split by: product/sector/contracted revenue
- Average sale/order value
- Sales volume analysis
- Work in progress
A question for you – how easy is it for your finance team to pull this information out?
I know of companies where it can take several weeks to pull out the data required for board meeting accounts. Unfortunately, I can’t remember the last time that I received all of the above information quickly and with minimal effort on behalf of the client. Often when I do finally get the information, it is across multiple Excel spreadsheets. You may question why I need this information and what I do with it. I compare key ratios such as: current ratio, working capital, margins, debt to asset, debtor days, stock turnover, return on assets, life time value of client, Z-score, and others against the competition or their particular sector.
When I ask the management team about these reports, I’m usually met with the following response: “We have been successful for the last number of years and now turnover x million pounds. Why do I need to report on any of this?” This is often followed by accountants or financial controllers saying: “What’s wrong with spreadsheets? I like Excel and I find it easy to use”. Well of course there is nothing inherently wrong with spreadsheets, but they are limited in the way they display information unless you are an advanced user who can design pivot tables, formulas and hyperlinks to drill down into the detail. There is a better way!
Many emerging, and even some established mid-tier, companies don’t have an IT strategy for their business and this is usually as a result of humble beginnings. An entrepreneur will start a business because they are highly skilled in some key aspect of their business perhaps marketing, sales, design, etc. but is less savvy in all areas, i.e. finance, customer experience, or operations (which includes IT and HR). If they don’t employ specific IT managers, the IT strategy is often left to the remit of accountants or financial controllers who are unlikely to have a thorough understanding of the strategic value of investing in the right systems to create shareholder value. Typically, IT investment is viewed as a cost they can do without and requires time-consuming training on new systems.
Client case study – poorly planned IT strategy
I will use a client of mine as a case study. They originally came to me because they had tried to sell their business, but found that the deal fell through as they didn’t have the relevant financial information to hand when it was requested by the buyer. The Purchaser needs to have confidence that information can be found quickly, and when it is – they know that the right systems are already in place. Even if there is variance on the management KPIs that are being recorded, access to the right information is incredibly important for business insight. They were too reliant on the owner of the business and the operations and business processes were neither efficient nor connected. They decided to take a positive from the situation by creating a strategic business roadmap to grow the company, and improving IT systems before trying to sell it once again.
“Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without the talking about the other” – Bill Gates.
In essence, they distribute widgets in a traditional but competitive market place, operate from two locations one being in the South with a warehouse in the Midlands, and turnover several million pounds. They have a number of people taking orders via fax, phone and email. These orders are processed and then the warehouse is tasked with picking and delivering the components.
Their key challenges were:
- No monthly financial reporting
- Order processing too slow
- Issues to do with the consistency of product pricing
- Order delivery delays
- Product return issues
- Stock management
- Resource issues during holiday periods
- Proactive customer relationships.
I discovered that they have many manual processes and when I had asked for my initial list of financial reports I only received last year’s accounts, and a simple P&L and balance sheet. All the other information requested was not readily available and required the IT support person to come in to show them how to extract the information into an Excel spreadsheet, which then had to be interrogated. Without going into too much detail, the company was exposed to risk in too many areas and in order to grow they required more people, which was going to be costly.
Product recommendation to benefit shareholders
The business roadmap included a critical element – an understanding of which IT systems could simplify their business. After extensive research, it was decided that an Enterprise Resource Planning Software (ERP) system was the best and only option to support the strategic growth plans. Microsoft Dynamics was the product that I recommended. The benefits of using an ERP system were simply enormous, ranging from reducing overheads, to improving the customer buying experience, through to having full and immediate financial control of their business, with no more logging into disparate systems that didn’t integrate/communicate with one another.
Ultimately they can create a business that processes and ships automated orders 24 hours a day, uses the order processing team to make outgoing customer focussed proactive calls, and has a dashboard to view live information about stock levels, trending items, pricing, top selling products, clients info, warehouse utilisation, etc. They will no longer rely on spreadsheets or clumsy reports to understand how their business performing. Their return on investment will begin after four months based on improved margins and faster responses to opportunity and cost management.
The benefit to shareholders include increased EBITDA from £1.2m to nearly £1.6m with other cost savings; less reliance on the management team due to efficient business operations; tacit knowledge of customers is held with the business instead of exclusively with the management team; and access to a future-proof platform that will enable growth without significantly increasing operating costs. Overall the business was originally worth (on the basis of a multiple of 5 EBITA) £6m, and is now worth £8.8m based on an increase EBITDA and multiple to 5.5 because the business is more attractive to potential buyers.
In simple terms, an investment of £80,000 has made a £2.8million increase in business value. I wonder how many MDs or accountants view IT investment in this way? Adopting a head in the sand approach and not being strategic with IT systems will hinder your business.
“Information technology is at the core of how you do your business and how your business model itself evolves” – Satya Nadella.
The smart people in business are starting to take the time out to understand how technology can improve their business, but ultimately how they can gain a competitive advantage? If you are either growing your business or selling it at some point in the future then your IT system must be part a key component of your business strategy.
A guest blog from Mark Baldwin, a Strategy and Management consultant.