Insight Business Growth

Insight Business growth

September 2008

0

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

business growth introduction

J

ust over a year on from the onset of the credit crunch, and the slowdown in the global economy, the threat of inflation and high oil price continue to cast a long shadow over corporate profitability and the ability of executives to manage their businesses. World financial markets remain jittery and susceptible to further shocks from the banking system.

0

Consumer confidence is undermined by weakness in the housing and mortgage markets.

relationship management, the use of technology and business software solutions can help companies stay ahead Yet against all this, opportunities of their competitors and ride for growth still exist for those out the economic downturn. small-to-mid sized companies that are innovative, competitive This selection of articles, and nimble. From enterprise each of which has appeared resource planning, supply in the pages of the Financial chain management, customer Times, provides an overview relations management, product- to business growth in an life management and supplier economic downturn.

CLICK PAGE NUMBER TO JUMP TO ARTICLE

03

07

13

17

21

25

sweeping away a sector’s chaos

ask the expert: US slowdown goes global

Adding IT to the sME toolkit

How to move forward from guesswork to hard facts

From baby steps to giant growth

reaping Huge benefits from some simple tidying up

The financial system is burdened with overlapping legacy systems that are impeding progress and proper risk assessment, reports Ross Tieman

Just when many emerging market companies were starting to flex their muscles in the global marketplace, the major economies suffered in the wake of the US subprime crisis and the credit crunch that followed

Technology vendors are focusing on small and mid-sized enterprises and are finding they struggle to cope with complex systems, says Alan Cane

Any executive would like to say they have the true status of their organisation’s business performance at their fingertips. Whether they really do will depend largely on the state of the company’s business intelligence systems. By Stephen Pritchard

Mothercare’s success outside its UK home shows the attractions of a franchising model in an uncertain market, writes Tom Braithwaite

Complexity is a dirty word in computing. The more convoluted something is, the more expensive and difficult it is to manage, and the more likely to go wrong. By Danny Bradbury

0

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

0

Sweeping away a sector’s chaos The financial system is burdened with overlapping legacy systems that are impeding progress and proper risk assessment, reports Ross Tieman

I

t sounds like an apocryphal story, but Nigel Woodward, Londonbased director of financial services at Intel, insists it is true. “At one of the big UK clearing banks, the core accounting system still does calculations in pounds, shillings and pence,” he says. Decimalisation was introduced in the UK in 1971, 37 years ago. The scale of the IT transformation needed in many areas of the financial industry is mind-boggling. Cobbled-together systems are still the bedrock of a hugely expanded sector accounting for an estimated 7 per cent of global gross domestic product. While bad systems did not cause the present credit crisis, they probably contributed. “Some big banks failed to keep track of the risks as the volumes built up,” says Intel’s Mr Woodward. He uses the example of sub-prime mortgages. When a bank bought a colGetty

lateralised debt obligation (CDO), “was the transaction recorded and tracked back to a residential property in Texas,” he asks. “The bank might already have had a full exposure to property in Texas but didn’t know.” Technology-enabled scale allowed traders to run ahead of banks’ ability to measure risk, he says. And when regulators and auditors started demanding answers about the scale of banks’ exposure, extracting the information from fragmented systems and databases was difficult and timeconsuming. Hence revisions to banks’ profit warnings, as the scale of risk was progressively uncovered. Jeremy Badman, partner in the strategic IT and operations practice focusing on investment banks at Oliver Wyman, highlights the problem that arose with credit default swaps, a mechanism used by banks to lay off risk that has turned into a market measured

0

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

in trillions of dollars. It started as a market where people fixed deals by phone, recorded them on a spreadsheet and faxed contracts. Backoffice processing was manual. But as volumes increased, settlement remained manual, and three-month piles of unmatched contracts built up - alarming regulators over uncertain risk positions. The lesson, says Mr Badman, is that technology has to support innovation, and processes must be “industrialised” quickly when a new product is successful. The trouble is that many financial institutions find this hard, because they rely on gummed-up legacy systems. Rudy Puryear, global head of the IT practice at consultant Bain, explains: “Many of the IT solutions have been layered on over 15 or 20 years or more. In the 1990s everyone went out and wanted to buy a best-of-breed solution and then had to bolt that on to the legacy system. Then everybody wanted web access, plus companies have made acquisitions of companies using different systems. “Almost every organisation I have walked into has a huge amount of unnecessary complexity in IT. It drives up cost and it slows down response in terms of time-to-market. We want IT to be an enabler of change. Right now it is very often like a block of concrete, adding rigidity to organisations.” His recommendations? “You have to recognise that you have a complexity problem and that it is bad. It is driving up cost and constraining the ability to respond to the market-place and it is using up more and more IT dollars. “You have to start saying you are not going to introduce more complexity. You have to create a future-state view of where you want to migrate this to in, say, five years time. You need to push a lot of shared, common, off-the-shelf solutions. So, as you make incremental decisions, you can measure it against how it helps you towards your desired five-year target.” One example of this kind of thinking in action is Oyster, a ticketing system for Transport for London, by which users pay fares with a smart card, which stores cash, and can be used to pay for

“Almost every organisation I have walked into has a huge amount of unnecessary complexity in IT. It drives up cost and it slows down response in terms of time-tomarket. We want IT to be an enabler of change.” Rudy Puryear, Bain

travel and other services. Jonathan Charley, head of banking, Europe, at EDS, which advised on Oyster’s creation, says it was built as a stand-alone solution because “to integrate it into an existing system would have been a huge challenge”. The system was built on an off-the-shelf package of services-oriented architecture, put together “like Lego bricks”. Clipping on ready-made flexible units that can take over tasks fragmented across existing systems seems a promising way forward. Charles Marston, who previously worked in the interest rate derivatives operation of a bank, founded systems and software company Calypso in San Francisco in 1997 to develop a universal front and back office platform. Today, Calypso offers an off-the-shelf system that can be used to trade a host of financial instruments, from spot foreign exchange via derivatives to equities and commodities, yet which also supports straight-through back office tasks such as settlement, and allows banks to capture the data they need for risk and capital management. About 80 institu-

tions have bought the system, including HSBC, Dresdner and Calyon. As Peter Van der Vorst, chief financial officer of Sybase, an integration, data management and platform company, points out, one of the biggest challenges for many financial firms is keeping pace with the need to process vast and booming volumes of information at appropriate speeds. So Sybase has just launched a product called RAP, designed to handle algorithmic computer-based trading, service the data needs of the quantitative analysts who write the algo programmes, and deliver the data needed to monitor trades for risk management and compliance. Retail institutions, too, are finding legacy systems an encumbrance to business development. Nationwide, a UK building society, has decided to embark on a wholesale system renewal using an off-the-shelf solution from software house SAP. Darin Brumby, divisional director for business systems transformation at Nationwide, says shifting to a new platform will enable it to introduce new products - different kinds of account, for example, and a suite of mortgages - that the current system cannot support. It will also allow improvements to front and back office organisation. It is tantamount to creating a new building society around the changed market and customer needs. Although it is costly, “we think there is a good first-mover advantage”, he says. SAP and US rival Oracle believe a pre-integrated offering is the best solution. Over the past few years they have been positioning themselves for the colossal orders that are beginning to flow as financial institutions start replacing legacy systems. Rajesh Hakku, senior vice-president of financial services at Oracle, reckons the company has spent $30bn buying best-of-breed suppliers and developing a pre-built application integration architecture. This one-stop-shop purchase of a core banking architecture with the features of your choice that are all promised to work

0

Getty

seamlessly has won some other big converts. Citibank, the world’s biggest with 350,000 staff, is among them, replacing 59 versions of its old corporate banking system with a single Oracle solution, in which, for example, a base in Singapore services 14 banking operations in Asia. It is, says Mr Hakku, the biggest legacy system replacement ever. The idea is that each bit can access all the data, and off-the shelf packages of analytics, for example, will keep a bank compliant with Basel II regulations, credit risk, and liability management, while assuring the flexibility to add in regulatory changes without complicating or compromising performance. “Two plus two equals five, if not 11,” Mr Hakku says. It sounds like nirvana. And today, maybe it is. But will it still be the best answer in 10, or even five years? “We know that

things will change,” says Mr Hakku, “but the basic requirement will always be to look at core data in certain aggregations.” David Hunt, head of technology consulting at Capgemini Financial Services, agrees on the importance of data, but cautions that the IT industry still does not necessarily deliver all the right answers. “What we are not good at, as technologists, is doing that low-cost, throw-away innovation,” he says. Yet financial services firms need to experiment with products as consumer technology changes. Today’s private bank customers “may be happy to come to the office and have a fat cigar, but their inheritors might want to bank on their X-box 360 or mobile phone,” says Mr Hunt. Tomorrow’s systems won’t just need to be agile, he says. In consumer, as well as investment banking, they will

need to support rapid innovation of products, and rapid industrialisation of those that succeed. It is a far cry from the days when they wrote that program in pounds, shillings and pence. Financial businesses are learning that they cannot see far into the future. System designers must learn not even to try. Jerry Norton, head of financial services at consulting and software group Logica, deserves the last word. A layered approach that separates fundamental systems from distribution channels can help. But fundamentally, it’s about philosophy, he says. “Most other things - consumer products, even buildings - have a design life-time.” Sure, a general ledger doesn’t change much. But isn’t it time systems were sold with an end-of-use date warning?

0

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

0

ask the expert: US slowdown goes global Just when many emerging market companies were starting to flex their muscles in the global marketplace, the major economies suffered in the wake of the US subprime crisis and the credit crunch that followed

H

ow damaging has the economic slowdown in the US, Europe and developed Asia been on the emerging economies? What pressures have spiralling inflation through high commodity prices put on global markets? Mauro Guillén is Director of the Lauder Institute and professor of international management at the Wharton School of the University of Pennsylvania. His answers to readers’ questions are appearing on the following pages.

Professor Mauro Guillén, Director of the Lauder Institute at the Wharton School of the University of Pennsylvania

How successfully, do you think, have Asian emerging economies decoupled themselves from the struggling Western markets? Will rising domestic demand save them? Sohaib Naim, Karachi, Pakistan Emerging economies have historically been at the mercy of developments in the richer parts of the world. Over the last two decades, however, their economic performance has become increasingly “decoupled” from Europe and North America. This may appear to be paradoxical because the globalization

of markets for goods, services and money was expected to bring about more convergence and coordination, not less. Can globalization and decoupling both be taking place at the same time? The answer is a resounding “yes.” Emerging economies have become less dependent on rich markets for three reasons: First, as you point out, they have developed more of a domestic market, not just for consumer goods but also for investment in equipment and in infrastructure (which is not always tied to exports). If consumer and business confidence does not fizzle, growth in emerging economies is likely to con-

0

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

tinue its upward trend. A second way in which decoupling has taken place is due to changing patterns of trade. Emerging economies are increasingly trading with each other, thus buffering themselves from the present downturn in the United States and most European countries. Although China is hugely dependent on the U.S. market, it is less so today than a decade ago. Chinese exports to the other three Bric countries, for instance, have surged by more than 50 per cent from last year, and it is also selling ever larger quantities of goods to the oil-rich Middle East. South Korea and Taiwan have also benefited from the development of other emerging economies, which has enabled them to diversify away from the U.S. market. A third important factor is that prices for raw materials and energy are not likely to fall as a result of the downturn. This is due to surging demand from China, India, and the fast-growing Latin American economies. Thus, emerging economies that are big producers of commodities will not be hurt by the downturn in the U.S. and Europe, at least not as much as in the past. In summary, emerging economies are likely to continue growing even as the rich part of the world slumps. Keep an eye on inflation, though. It could spoil the party. Would you be able to provide an outlook for commodity prices and the Brazilian economy in particular? Miguel Castellanos, Ft. Lauderdale, FL I do not see a fall in commodity prices any time soon. There are two key developments to watch: The first is to wait and see how deep and long the economic downturn in the U.S. and Europe will be. If it proves shallow and brief, as a growing cadre of economists are predicting, then commodity prices will remain at record levels. A second issue to keep in mind is demand from emerging economies with a rapidly expanding domestic consump-

tion and capital spending. The latter is growing swiftly in China, India, Brazil and elsewhere, and it is not always linked to exports. Infrastructure spending, in particular, will continue to grow at double-digit rates in many emerging economies, fuelling demand for all sorts of raw materials. Energy prices are also likely to continue growing as demand in emerging economies expands, supply bottlenecks go unresolved, and political uncertainty remains high in certain oil-producing countries. Brazil is the country of the future, and this time around it could well realize that potential. Its macroeconomic outlook is strong. Demand for Brazilian manufactures as well as raw materials is likely to continue growing in the medium run. Another promising development has to do with the recent oil finding offshore. I am personally very optimistic. Brazil is a major exporter of commodities, but the largest category is actually transportation equipment and parts (about 12 percent of the total). GDP growth is robust, and inflation low. Now Americans can’t afford to buy made-in China-deer hunting hides that hang in trees and other rubbish to clog up their garages, how much will this affect Chinese and other Asian exporters? David Lyttle, New Zealand I agree that Americans have spent way too much on consumer durables and non-durables they really did not need. What’s worse, most have borrowed in a variety of ways in order to indulge in such short-sighted behaviour. The decline of the dollar, though in part driven by the yawning gap in monetary policy across the Atlantic, is mostly a reflection of the ballooning fiscal and trade deficits, and the low savings rate. Asian exporters will be affected by these developments, but one should keep in mind that, as their domestic consumer markets grow, they are increasingly selling to each other as op-

posed to the United States. Having said that, a long and deep downturn in Europe and the U.S. would hurt them, but not as much as, say, 5 or 10 years ago. What will be the real impact of the slowdown on Third World countries? Jimmy, New York I do not believe Third World, i.e. truly poor, countries are being hurt by the slowdown in the U.S. and Europe. As long as emerging economies continue growing, demand for energy and raw materials will remain solid. I see the problem in a different area, namely, food prices. Increased demand from the rapidly-growing emerging economies and wrong-headed biofuel policies have caused a quintupling in the price of some staples such as wheat, corn and beef. This, and not the slowdown, is devastating some of the poorest countries in the world.

How will China retain their subsidies in the wake of a decreasing trade surplus? Will the Chinese resort to deficit spending? Phil Vernes, CT I am deeply concerned about gasoline subsidies in China, which run at billions of dollars a year. It is simply foolish for them to continue this charade. The longer it goes on, the harder it will be for people to adjust to the harsh reality of high energy prices. I sincerely hope that they will gradually eliminate the subsidies. This is a no-brainer. What is your feeling about the effects of recent crises on Russia, as a major producer of energy products? Would it be easier to cope with inflation inside of the country, who owns natural energy sources? Vlad Kamlyuk, Ireland Russia is enjoying a boom in commodity and energy markets. Prices are likely to remain high for the foreseeable future, so there will be little incentive for the country to change direction. I say this because the downturn in the U.S. and Europe is unlikely to reduce global demand by much, as emerging economies are still growing and “decoupling” has taken hold. Inflation is indeed a problem, but definitely not the most important one in the long run. Russia is running the risk of becoming too specialized in raw materials and energy (already about 80 percent of total exports). Russian manufacturing was not in good shape to begin with, and the last few years have been devastating. Many of the country’s most talented scientists and engineers migrated during the 1990s Wage inflation makes it difficult for firms to compete internationally. The service sector is run by state bureaucrats, and there are alarming signs of lack of transparency, even corruption. While increasingly wealthy, Russia could and should avoid wasting its human capital and its many other resources.

How, in your opinion, would high commodity prices affect the economic recovery of Central and Eastern European nations and, in particular, the Baltic states? Maksim Greinoman, Tallinn, Estonia High commodity prices are generally detrimental to Estonia, Latvia and Lithuania because of their dependence on imports, their large trade deficits, and the inflationary pressures (which have thwarted their entry into Europe´s monetary union). They do benefit from price increases to the extent they export raw materials such as timber, but on the whole they are mostly hurt by it. The three Baltic states have grown very rapidly over the last few years thanks to a construction boom and to privatization. But the competitiveness of the manufacturing sector has been undermined by rising wages. The three countries need to increase productivity if they are to succeed in a fully integrated Europe. Do you think the Sarbanes-Oxley legislation in the US and other such accounting procedures forcing companies to write down losses are more responsible for current problems than anything else? If that is the case, shouldn’t there be efforts to introduce a better system? Nitesh Bansal, India Sarbanes-Oxley has been (justifiably) blamed for inducing a number of problems, including the loss of global competitiveness of U.S. financial markets and of corporate America in general. Writing down losses in asset values, however, is a reasonable and highly desirable accounting practice prevalent around the world, which predates recent regulatory changes. Investors expect company accounts to reflect the present market value of their assets. We are living through a crisis that is fundamentally one of declining confidence. If companies were able to carry

10

assets on their balance sheets at the inflated values of the recent past, investor confidence would plummet. I would then fear a drastic drop in stock market turnover, further fuelling the liquidity problems afflicting the global economy since last summer. Given the improvement in fiscal position of emerging market countries, their increasing important domestic demand and their infrastructure spending plans – do these elements combined justify a re-rating in the relative premium investors should seek vis-ávis developed markets? Should emerging market equities demand a premium to developed market equities in the coming years? Jim Sheffield, Charlottesville, VA International investors demand a premium if they believe that there are unusual risks. Improvements in fiscal position, trade surpluses, inflation, and robust domestic demand may or may not reduce the risks. While many emerging economies are now enjoying fiscal and trade surpluses, inflation is picking up speed. Inflation can worsen trade balances and the exchange rate, thus generating risk to the international investor. Some analysts argue that fiscal surpluses, while a sign of discipline, may also increase the ability of the government to make the wrong decisions, thus generating uncertainty. In the long run, I would focus the attention on the institutional structures of emerging economies, on the ability of governments to credibly commit to a set of policies in the long run, and on the functioning of the judiciary and the political system in general. I personally believe that there is plenty of “institutional” risk in emerging economies in spite of the relatively favorable macroeconomic outlook. As a result, I would continue to demand a premium.

11

Is the current stagflation (in the US and some EU members) here to stay, given the current level of global competition? Now that the Brics nations and major oil exporters are fast emerging, is the world geared up for dramatic changes in the activities of multilateral institutions in dealing with issues of global concern? Augustin Dufatanye, Reykjavik We are all hoping that stagflation will not be here to stay. But the signals and the indicators are not too encouraging. The biggest threat is inflation in emerging economies, which could derail the only engines of growth that exist right now. In the U.S. and Europe, inflation must be kept in check. Regarding multilateral institutions, there has been a flurry of activity redesigning their roles and the voting power of different countries. We are definitely at a crossroads, for two reasons. One is the rise of the Brics, that is, their increasing weight in the global economy. The other is the trade imbalances resulting from the rise in commodity and energy prices. On the positive side, we are better equipped today to deal with these issues than 35 years ago. Economies and markets are much more flexible today. But people will need to absorb much of the shock in the form of unemployment, relocation, and the like. It seems that the markets are being roiled in a battle between recession and inflation. The Fed Reserve has an ability to raise rates and possibly decrease the risk associated with inflation. What can we anticipate, should recession be the overriding factor in the US ,and what are the long term effect on world markets? Should the US Congress intervene and attempt to control the price rise for oil as suggested? Robert J. Arnell III, Hardwick, Vermont Policymakers are definitely in a bind.

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

An economic slowdown with inflation is not only difficult to deal with from an economic point of view; it is also an explosive combination politically. Some groups in society detest inflation, while others have a more tolerant attitude towards it. In the U.S. I would not expect any bold action until after the November election. There is still hope that the worst of the credit crunch is over, or nearly over, and that the slowdown will be shallow and brief. But we still do not have enough information to make that call. Regarding the U.S. Congress, I very much doubt that they can affect oil prices in the short run. In the long run, legislation could encourage both conservation and supply expansion. I would hope the right incentives are introduced for a massive investment boom in alternative energy sources, especially hydrogen automobiles, wind, and solar. Lastly, the present biofuel incentives need to be revisited, given their impact on agricultural markets How can India maintain a 7 per cent to 8 per cent GDP growth over the next 15-20 years but keep inflation between 3 per cent and 4 per cent? Aspi Contractor, USA As a net importer of commodities and energy, India is indeed prone to fierce inflationary pressures, and this could derail the very robust GDP growth that the country has been experiencing. With elections coming soon, it is not clear that the government will do what would be best in the long run. Prime Minister Singh might be tempted to strengthen the base of support for this party, but the public-sector deficit is already quite large. The best recipe is to continue introducing reforms and deregulation, especially in the infrastructure and energy sectors of the economy. Policymakers need to signal very forcefully that they will not let inflationary expectations build up. Taxes on investment and other burdens could be lessened so that both port-

folio and direct investment flows into the country at increasing rates. India needs more foreign investment to fuel growth, especially in the service sector. What’s your view on the countries of the old Soviet Union? Some of them can hardly be called emerging markets. Dilmurad, Nashville, Tn USA I am quite optimistic about the prospects for the former Soviet republics bordering on the European Union, assuming they work hard to create robust political and legal institutions over the next decade or so. The central Asian republics are a different story. They do not have too many options. They are not natural manufacturing enclaves, given their geographical location. They are subject to strong geopolitical influences. Some of these countries have been growing very quickly. The largest, Kazakhstan, continues to grow at 5 or 6 percent, but inflation, deficits, and the credit crunch could slow down the economy. In the long run, the central Asian republics need to come up with some mutual understanding as to how to create a common market. It does not make sense for them to operate in isolation of each other. What is the engine for recovery in the United States if it is not housing, autos, capital spending and commercial construction? These are the typical interest rate sensitive areas that normally lead you out of a recession. Rates are actually higher than before the Fed started lowering rates for most of the above and these areas will remain weak through 2009 and some of them will be weakening through 2009-10. Alex Sinclair, Rancho Mirage, Ca The U.S. economy’s best chance for recovery lies in its flexibility, its ability to adapt to change. We have already

seen a surge in exports in response to the weak dollar. Unfortunately, federal, state, and city governments are deeply in deficit, so they cannot help out by accelerating infrastructure spending and the like. Perhaps the most important “engine” is confidence. Consumers and lenders need to regain their mutual confidence. This trust has been shattered over the last 12 months in the wake of the subprime crisis. The damage has not yet been contained, and it is spilling over into many different areas. An economy so dependent on domestic consumption cannot possibly grow robustly if there is a lack of confidence among economic actors. The key is to a recovery lies in rebuilding the foundations of confidence. The Fed and the new president elected in November will have to work hard to put the pieces back together.

The global credit crunch seems to have made Spain awaken to the risks of its economic imbalances. What is your perspective on Spain’s ability to deal with the crisis? How do you see Spain in the future, more like Germany or Italy? Carlos Colomer, Madrid, Spain Spain faces a difficult situation. The signs of trouble were already visible a few years ago, but they were crowded out by the construction boom and the excellent performance of Spanish firms across the board. The Spanish economy has long suffered from three interrelated problems: sluggish productivity growth, an inflation differential with the euro area, and meager expenditures on innovation and research and development. The credit crunch has added to the problems. While Spanish banks are very solid (and did not participate in the subprime market), they are no longer lending money to each other, and they have tightened lending practices. Spanish firms are shielded from the slowdown because of their massive presence in Latin America. But the problems with productivity, inflation, and innovation remain. Spain has recently overcome Italy in per capita income. This is in part due to Spain´s successes, and in part thanks to Italy´s many problems, especially with its politicians. Spain has done well after privatising, deregulating, and opening the economy. But these reforms need to be further deepened. Spain lacks Germany´s discipline and innovativeness. Germany is an export machine; Spain runs the second largest trade deficit in the world after the US The issue right now is whether Spain will avoid a prolonged slowdown or even recession or not. The next few months are crucial, especially in terms of job destruction.

12

Can it be said that the subprime crisis in its totality is a ”zero-sum” game? If the banks have lost money some body has gained in the transactions, so the wealth in the economy as whole has not been destroyed, only it has been redistributed. So how this is creating slowdown in the economy as a whole? Bikramjit Bhawal, Italy The subprime crisis has wreaked havoc on the balance sheets of major financial institutions in the U.S. and Europe. That in and of itself is a major problem that no other gains obtained by other economic actors can possibly compensate. Financial stability is very important. It should also be remembered that the credit crunch is a crisis of confidence, and it will be very difficult to rebuild. There have been ”winners”, to be sure, including those who shorted financial stocks, the buyers of certain securities at bargain prices, and others. But the pain being felt around the world is huge. Let us not forget that many people are losing their jobs, their homes, or both, as a result of this crisis. Plus consumption, a major driver of economic growth, is on the decline. Wealth has been wiped out in many different ways because the prices of many different kinds of assets have declined sharply. We are now paying for the excesses of the last few years, and for the lack of appropriate regulatory oversight I wished the wins were big enough to offset the losses. Unfortunately, this is not a zero-sum situation.

13

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

14

Adding IT to the sME toolkit Technology vendors are focusing on small and mid-sized enterprises and are finding they struggle to cope with complex systems, says Alan Cane

T

he past few years have seen a marked change in the marketing of software and services. Vendors such as SAP and Oracle, which had previously confined their attention to the giants of the business world, have begun to court small and medium-sized enterprises (SMEs) with a cornucopia of new products. “So many companies that have traditionally focused on large enterprises are now going into the SME market. It is amazing. Everything is about SMEs,” says Joslyn Faust, principal analyst specialising in the SME market for Gartner, the consultancy. But, she warns, it is not necessarily to everyone’s benefit. “Many of these vendors do not understand that it is a totally different business model. Service, support and pricing are all very Getty

different. The products need to be very simple and they all need to work together. SMEs are worried that the IT they are offered will prove to be too complicated, too costly or that the vendor will consider them too small for proper support,” she says. Buying consumer-grade technology is one answer for very small firms. Eilert Hanoa, chief executive of Mamut, a European provider of integrated software and internet services for SMEs, shares Ms Faust’s concerns: “There is a misconception within the SME sector that technology is expensive and that it is a luxury a small business cannot afford. Most SMEs have few people to turn to for technology advice and this has led to an abundance of fear, uncertainty and doubt when buying IT.

15

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

Getty

“This sorry state of affairs has been compounded, and in some cases encouraged, by an IT sector that has done the SME sector a disservice by downsizing enterprise applications for the SME market without addressing their need for less complexity.” SAP, however, one of the world’s largest software groups, has seen a significant change in its mix of customers over the past 10 to 20 years. At one time it was a provider of enterprise resource planning (ERP) software only to large corporates, it now estimates that 70 per cent of its customers - about 35,000 globally - are SMEs. Simon Etherington, head of the SME division for SAP in the UK, says the sector is covered by a three-product family: Business One, an out-of-the-box business management system for com-

panies with less than £30m-£40m in turnover; Business by Design for larger groups; and Business-all-in-One for vertical industries. These products are generally marketed to customers via channel partners who can offer technical help and business advice. Are there any companies too small for an SAP offering? “If there are, we haven’t found them yet,” says Mr Etherington. But he warns that IT is no magic bullet. The customer, he says, must have a clear vision of what it wants to do, where it wants to go and how it thinks IT can support its objectives. He says that SMEs may have an advantage because they see their business processes - essentially what the business does - more clearly than bigger enterprises. And any IT investment must be treated as a business project rather

than an IT initiative, he counsels. Dawn Baker, head of marketing for the small business division of Sage, the UK accounting software group, concurs: “Small businesses have to make monthly decisions based on cash flow. So an owner may be faced with the dilemma of whether to take £100 extra as a bonus or use it to buy a piece of software. “Another option, especially for businesses at the upper end of the SME sector is to look into hosted versus onpremises software solutions, as this might provide a higher degree of flexibility with less up-front investment. Either way, any investment in IT should be linked to a business plan.” Big-ticket technologies such as ERP are not alone in being reconfigured to fit a smaller customer. Virtualisation running a number of operating systems

and application packages on the same server - is becoming increasingly attractive to small companies, not simply because of savings on the cost of servers but because of disaster recovery and business continuity. Martin Niemer of VMware, a leading vendor of virtualisation software, says that companies with only four or five servers and fewer than a dozen staff are virtualising their servers as a protection against downtime, “which could cost them a huge amount of money”. Typically, VMware consolidates applications from 10 machines on to a single server. The latest servers can run as many as 30 virtual machines. So how do we define an SME or SMB (small and medium-sized business)? Definitions vary geographically. In Europe, a small company might have 10-49 employees and a medium-sized one, 50-250. In some regions, 5,000 people might still constitute a medium-sized company. Smaller concerns are generally seen as more flexible and agile than their larger competitors. Simon Devonshire, head of SME marketing for O, the mobile operator, says small businesses are typically quicker to adopt new technologies than large corporates. “This is largely the consequence of a difference in the attitude towards technology in small versus larger businesses. In large corporations, new technologies such as the latest handheld mobile device and laptops are often viewed as a privilege, restricted to senior management. “Small businesses are more likely to recognise the business benefit that a new technology will bring as opposed to seeing it as a status symbol.” Again, the technology cannot be deployed unthinkingly. Michel Robert, managing director of the European hosting group Claranet warns that SMEs must be sure their investments will move the business on. “Most SMEs don’t care if the technology is the newest or the fanciest or the quickest. They care about reliability and about whether it will take them in the right direction. SMEs cannot afford to experiment and get it wrong.” He points to the dangers of growing

“There is a misconception within the SME sector that technology is expensive and that it is a luxury a small business cannot afford. Most SMEs have few people to turn to for technology advice and this has led to an abundance of fear, uncertainty and doubt when buying IT.” Eilert Hanoa, Mamut

complexity, which SMEs may be illprepared to deal with. He recommends outsourcing the bread-and-butter operations: “This will allow you to focus the technical resources you have on the future and on innovation and on aligning IT with the business.” The impact of the internet on SMEs has been particularly strong. While a couple of decades ago, an SME might be considering what accounting package to buy, today it is chiefly concerned with connectivity. Chris Stening of Easynet, part of the BSkyB group, says the company has seen an exponential demand for broadband from SMEs driven by e-mail, web traffic and online applications. “The internet has changed the way small businesses think about themselves,” he says. A company can use a cleverly de-

16

signed website to make it seem larger than it really is: equally, a failed internet connection can quickly cost a small company more than it can afford. A survey carried out among UK SMEs by Quocirca, the consultancy, for Easynet Connect, the company’s SME network, says connection has become vital for many: “While a quarter of companies could work for days with no internet connection, most companies require failures to be fixed inside a day. For one in four, time to fix is even tighter at less than an hour and for some no break is acceptable. “In such critical situations, a second redundant connection has to be worth considering,” Quocirca recommends. The survey shows that from a simple web presence and e-mail, SMEs are selling online, using internet protocol telephony and networked video. Almost half use the network for remote backup and disaster recovery. Are there simple guidelines that SMEs should follow in their adoption of IT? Joslyn Faust of Gartner suggests that potential buyers should not focus on price too strongly. “Free or almost free does not mean stress-free,” she says, adding that new additions must work with existing equipment if the company is not to have problems as it grows. She also says it is important to make sure that the vendor understands the customer’s business. “Too many do not understand these vertical markets, which leads to frustration for their customers as they get up to speed.” There are heartening signs, she says, that vendors are working towards the idea of “one-stop shopping” for SMEs. “That is what SMEs have always wanted but what they have not been able to have because of the state of the market. It takes a few years for vendors to get it right.”

17

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

How to move forward from guesswork to hard facts

Any board-level executive worthy of the name would like to say they have the true status of their organisation’s business performance at their fingertips. Whether they really do will depend largely on the state of the company’s business intelligence systems. By Stephen Pritchard

T

he pressure on managers to make better use of company data - and better understand how their organisations are performing - has put business intelligence technologies at the top of IT spending in the last two years, ahead of security and compliance. “The CIO has been the custodian of information, and he or she is looking for a layer [of technology] that helps bring data services together and helps provide an information source for the business,” says Don Campbell, chief technology officer at BI vendor Cognos. “The CEO is looking for decisionmaking tools to help guide his company. Companies have made a great

18

19

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

investment in collecting the data, but now want to derive value from it.” This shift has made BI the focus of a buying spree by enterprise technology vendors: in March, Oracle paid $3.3bn for BI specialist Hyperion, and this month rival SAP agreed to buy Business Objects, for €4.8bn ($6.8bn). These deals are significant, and not just because they represent continuing consolidation in the market for large business software systems. Companies selling enterprise resource planning (ERP) software, such as SAP and Oracle, recognise that boards of directors want more than just the raw data that systems such as ERP produce. They want to be able to analyse that information to support decision-making and to make more accurate forecasts and plans. Unfortunately, better decision-making demands far more than just plugging in a business intelligence application to the company network. A large enterprise might well have a dozen or more business intelligence systems, data mining systems, enterprise performance management suites and reporting and analysis tools. This creates a huge burden for the CIO to support, and leaves line-of-business managers unsure of which sources of data to rely on. As a result, companies are often forced to deploy a further set of tools on top of their existing data warehouse and business management technology, in order to produce a consistent set of reports. Conventional business intelligence, whether done in a standalone tool or in a spreadsheet such as Microsoft Excel, is based mostly on analysing past data. This information is typically days, weeks or even months old. But companies increasingly want up to date, or even “real time” business intelligence data. They might want this to enable senior managers to make accurate decisions more quickly, but it is just as likely to be driven by a need to give frontline staff better tools to make choices when they are in front of the customer. “The trend in the past 18 months has been away from [analysing] data

Henning Kagermann, co-chief executive of SAP

Mr Kagermann and John Schwarz, chief executive of Business Objects

“The trend in the past 18 months has been away from [analysing] data from last year and last week, to data that is hours old.” Royce Bell, Accenture Information Management Services

Business Objectives Office

from last year and last week, to data that is hours old,” says Royce Bell, CEO of Accenture Information Management Services. The technology to do this is also improving. One benefit of the deal between SAP and Business Objects, according to SAP co-chief executive Henning Kagermann, is that Business Objects will be able to use SAP’s know-how to allow much faster, “in memory” analytics for customers. To date, companies needing real time or operational business intelligence have had to turn to smaller, more specialist solutions. Secure printing and cash management company De La Rue, for example, uses portal based BI software from QlikView to enable its customers to monitor the performance of banknote sorting machines in their cash centres in real time. According to Jon Ryley, responsible for the project, maintenance costs on the sorting machines - which cost between £400,000 and £1m each - has halved, and in-service uptime has improved considerably. The data has enabled De La Rue to cut its operational costs, and its customers can make better use of their expensive equipment. The challenge for companies is to take such specific applications and tie them together across the business, both to reduce costs but also to improve the consistency of the information they deliver. “Real-time business intelligence is theoretically possible but is so expensive that few people want to do it,” says Andreas Bitterer, research vice-president at Gartner. “But the move towards real-time technologies is reducing latency [in BI], which is helping companies to use BI with operational data. They are moving from gathering data weekly or hourly to every five minutes, so you can base business decisions on more or less real-time events.” For some companies, the analysis and reporting capabilities included in ERP or CRM (customer relationship management) will be sufficient. Both

Oracle and SAP’s recent acquisitions have significantly added to their BI functions, and other vendors, including Microsoft, have also worked to improve BI within their applications. Cosalt, a supplier of maritime safety equipment, is using the business intelligence functions in its ERP system - from vendor IFS - to track sales performance, especially from smaller orders. “The system has improved what we call our bread and butter sales. We are targeting orders under £10,000, because we had focused on big orders, but 70 per cent of our business is from smaller deals and tracking them has made a big improvement year on year,” says managing director Winston Phillips. The challenge for businesses, as they grow, is to tie such systems together to create an “enterprise” view of business intelligence. Companies also need to take on board emerging capabilities - such as enterprise performance management and the pressure from a new generation of knowledge workers to have BI analytics tools on their desktops. Rather than rely on specialist analysts to compile reports for the CFO once a quarter, more firms want to use the latest BI systems to support decision-making from shop floor or call centre to boardroom. A large data warehouse with the latest data mining and analytics tools is the tidiest solution, but it inevitably means a hefty investment in both cash and development time. None the less, companies in sectors as diverse as retail and energy have made such investments, and seen significant financial returns. But the warehouses have to be well engineered to fulfil this task. “It is still a challenge for most organisations to create a BI system to optimise their enterprise performance, and do so in a timely manner,” says Eddie Short, vice president and global leader of business information management at Capgemini. “Traditional BI involves building huge data warehouses, and that brings with it a lot of latency.” For smaller companies, and those that cannot justify a state of the art data

20

warehouse, the hope is that specific business intelligence projects, or investing in a centralised BI system that draws data from the underlying business applications, will bring most of the benefits. But the benefits will not come without both effort and investment. “Most organisations have data all over the place, in many different systems, in applications and databases,” says Gartner’s Andreas Bitterer. “Those cases require a lot of data integration, metadata, and data quality efforts to yield good BI results, as most sources differ in the way they store, define, provide common data.” To be successful, it will also require a cultural change. Good business intelligence means greater transparency, with staff sharing the data behind their decisions, both up and down the management chain. It also means using what Accenture terms “bounded decision-making”. The point is neither to put every employee on the board, nor to let the board try to run the factories, just because they have access to the data. “Start with measurable key performance indicators,” advises Oracle’s Paul Rodwick. “Then use BI to help individuals make factual, not gut decisions. “If you have anarchy, it’s because people don’t have the right facts or don’t understand how decisions might affect the company. So they need to understand the key performance indicators, before they can do their own analysis.”

21

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

22

From baby steps to giant growth Mothercare’s success outside its UK home shows the attractions of a franchising model in an uncertain market, writes Tom Braithwaite

I

n 1984 Mohamed Alshaya, the young scion of a wealthy Kuwaiti dynasty, educated at Wharton business school and working at Morgan Stanley in New York, received a telephone call from his father. “You had better come back to the family,” said the elder Mr Alshaya, with a summons Mohamed had always known would come. Business school and the bank had been mere staging posts before a return to the family company. But before the journey home there was one last educational stop for the suave son - a stint on the shop floor in a Mothercare store in Manchester. The apparently unlikely link that then developed between Mothercare and the Getty

Middle East is much closer today. The UK mother-and-baby products retailer has been the most important partner for M H Alshaya, which has expanded from a relatively small family conglomerate into one of the world’s most successful franchise operators. Franchising has its share of believers and sceptics. Critics argue that allowing a third party to manage your brand and take profits off the back of it can never be the right way to proceed. But now the model may be coming into its own. Retailers in the US, UK and much of Europe are seeing the fallout from the credit crisis translate into slowing sales. Those that laid the foundations early for expansion in emerg-

23

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

Mothercare store UK

ing markets are reaping the dividends as fast overseas growth helps offset the torrid markets at home. “This is an incredibly important time to push hard,” says Ben Gordon, chief executive of Mothercare. “The retail markets are being built now. The brands are being built now.” Alshaya now operates 116 Mothercare stores, but it also has dozens more branded stores in the Middle East and as far as Poland and Russia, with brands ranging from Topshop to Starbucks. This year the company expects turnover of more than $2bn (£1bn), up from $1.6bn last year. “Mohamed, on the back of Mothercare, has built a £1bn company,” says Mr Gordon, whose admiration for his Kuwaiti partner’s success is plainly reciprocated. For the brand owner, the appeal of franchising lies in its low-risk structure and speed: little capital has to be de-

Retailers in the US, UK and much of Europe are seeing the fall-out from the credit crisis translate into slowing sales. Those that laid the foundations early for expansion in emerging markets are reaping the dividends as fast overseas growth helps offset the torrid markets at home

ployed, the franchisee bears most of the cost of store openings and staff, pays cost-price for the products and a royalty to the franchiser when they are sold. “Some people say to me ‘Gosh, you’re giving away net margin,’ “ says Mr Gordon. “Then I say: ‘We are charging a royalty and frankly you’d have to do pretty well to outperform’.” Today, the company - with a market capitalisation of less than £350m - has about 500 stores in 48 countries and international sales are expected to overtake the UK in the next few years. “We have got 400 stores in the UK with a 60m population,” says Mr Gordon. “You’re not expecting that ratio in India but in Greece we’re more than that [ratio] now. If you did it yourself, you’d do it at a 10th of the speed.” The structure also mitigates the difficulty of operating in countries where local laws and culture can prove testing

- even insurmountable - barriers. “Pigs are cute in some countries and offensive in others,” notes Mr Gordon. Purple, says John Lappas, the Greek franchisee for Mothercare, is funereal in Greece but fine in Romania, where Mr Lappas has recently introduced Mothercare. More practically, pushchairs with broad wheels are good news in sandy countries but also in snowy ones. Choosing the wrong partner in franchising, however, only crystallises the risk. As the chief executive of one franchiser recalls: “The franchisee started opening stores without telling us, which is a no-no. They broke the rules. They were effectively stealing from us.” Trust is essential for both parties, with both able to affect brand value and both invested financially and emotionally in its success. Mr Lappas attests to the importance of the relationship with the retailer’s management: “Mr Ben Gordon is the perfect manager. We feel confident that we will not die with them.” Mothercare allowed its new Indian franchisee to develop its own billboard advertising campaign, with the slogan “Baby is coming . . . “ plastered all over Mumbai. BS Nagesh, chief executive of Shoppers’ Stop, Mothercare franchisee in India, says he values that freedom and wryly notes the principal benefit of becoming the Indian franchisee of one of the world’s leading mother-and-baby brands: “With a never-ending population boom we could see the opportunity.” That confidence was not so great in the past decade. Both Mr Alshaya and Mr Lappas say they were worried by Mothercare’s dwindling success in the UK and un-impressed with the previous management’s ability to cope, a development that underlined the risk for a franchisee of owning a business built on a waning brand. Increasingly, however, retailers are trying to have their cake and eat it. Gavin George, head of retail at financial services company Ernst & Young in the UK, who has helped retailer New Look launch in Russia and Argos launch in India, says: “We ensure that every franchise agreement has a buyback [clause].” Zara, part of Spain’s Inditex group,

Starbucks Saudi Arabia

From a retailer’s perspective, barring the current economic slowdown, the US offers decent medium-term growth opportunities and some big names in the US, such as American Eagle, have seen no need to expand their operations overseas

has always preferred to have full control of its overseas stores and has bought bigger slices of joint ventures and franchises in Germany and Russia. UK fashion retailer Next has bought its franchisee who operated in the Czech Republic, Slovakia and Hungary. Marks and Spencer bought out its joint venture partner in Greece and the Balkans. Although the franchise model has fallen in and out of fashion over the past

24

decades, it may be that the close relationship such as that between Mothercare and Alshaya becomes rarer as the biggest brands come to feel increasingly confident about operating in emerging markets. That offers potentially greater rewards for those companies with the skill and capital to go it alone, but it also extends the list of pitfalls they must face directly - from legal risks to the more arcane but equally explosive elements of pigs and the colour purple. Saturation forces British brands to eye overseas opportunities A number of global brands have been at it for years: McDonald’s and, subsequently, Starbucks are prime examples of US companies building their businesses by embracing international franchising as a lower-cost, lower-risk alternative to wholly-owned stores. But in pure non-food retail, American companies are not such an important force in franchising and international expansion. Spain’s Zara and Sweden’s H&M have been the leading movers in fashion over the past decade. And a large number of UK brands have been quietly expanding overseas for some years. “UK brands are more known to the Indian consumer than the American brands,” says B.S. Nagesh, chief executive of Shoppers’ Stop, the Indian department store operator and Mothercare franchisee. “I, as a middle-class [shopper], could relate.” From a retailer’s perspective, barring the current economic slowdown, the US offers decent medium-term growth opportunities and some big names in the US, such as American Eagle, have seen no need to expand their operations overseas. Gavin George, head of retail at Ernst & Young, the financial services company, argues that for the UK, on the other hand, staying put is foolish. “For us, there isn’t much choice any more,” he says. “If the UK is either mature or saturated, the pressure to move elsewhere is compelling.”

25

INSIGHT BUSINESS GROWTH

INSIGHT BUSINESS GROWTH

REAPING Huge benefits from some simple tidying up

Complexity is a dirty word in computing. The more convoluted something is, the more expensive and difficult it is to manage, and the more likely to go wrong. By Danny Bradbury

U

nfortunately, because computing infrastructures develop erratically, many businesses end up with hundreds of poorly documented software applications, installed by forgotten development teams and long-departed managers. Many of these applications do the same thing, and they rarely talk to each other. Some companies try to consolidate applications; boiling them down to a simpler set of systems. One such is UK transportation giant, First Group. Darin Brumby, its CIO, explained: “A lack of business ownership and sponsorship of projects in the past had led to a sea of data, but no information for the decision makers.” First Group’s consolidation process is part of a larger initiative to stabilise Getty

its IT operation and bring it in line with the needs of business managers. The company is also one year into what Mr Brumby sees as a three-year programme to cut the complexity of its applications base; it has already cut its 300 software applications by 50. It is reaping the benefits. Four years ago, the company had different inventory management and maintenance systems for its businesses, meaning that it could not centrally control stock and had limited insight into its warranties. Replacing the applications with SAP’s enterprise resource planning (ERP) system enabled the company to use a single application for inventory and maintenance across all 20 of its operating companies. “The benefits were enormous,” says Mr Brumby, “not only in process controls and improved operational efficiency but, more importantly, we were able to embed the standard operating procedures of the organisation into that platform, which of course you can’t do with 20 separate platforms.” Application consolidation can deliver big cost-savings, says Eric Stephens, enterprise architect for health insurance company Excellus BlueCross BlueShield of Rochester, New York. It takes more people more time to maintain arcane collections of interconnected software, and as the applications age, the skills to maintain them may disappear. Another driver is agility, says Mr Stephens. He is working on a project to whittle the company’s 500 applications down to about 35. The health insurance sector is heavily regulated, which forces the IT department to make lots of compliance-driven, time-consuming changes to its software. “Having an ecosystem of software that’s easy to maintain helps with agility and adapting to market changes, but also lets you drive down costs,” he says. Excellus’s rationalisation programme involves listing each application along with the business functions it serves. The team ended up with a spreadsheet documenting software attributes in 70 columns. This data was given to a consultancy.

Moir Lockhead, chief executive First Group

Four years ago, the company had different inventory management and maintenance systems for its businesses. Replacing the applications with SAP’s enterprise resource planning system enabled the company to use a single application for inventory and maintenance across all 20 of its operating companies

It mapped each application on to a grid, with one axis describing the business fit, and the other describing the technical fit. This gave Excellus information on which applications to ditch, keep, or replace. Consolidation can be a slow process that only delivers benefits over time and boards with short-term expectations may eschew such strategic initiatives.

26

Excellus’s board was willing to fund the project as part of a wider initiative called IT Evolution, which aimed to align the company’s IT with the way the business worked. Sometimes the opportunity for change arises because the business is in a state of flux. George Glass, chief architect at BT, is reducing 3,500 applications to 500. He was able to do it partly because the company wanted to replace its telecommunications network with a new one designed to support internet protocol. This initiative, called the 21st Century Network, needed big changes in the application base. “If you’re having to do it anyway, do it right, with strong engineering principles, with disciplined design practices,” says Mr Glass. His team decided to set out its application needs in terms of the services they would provide to customers. They defined 14 core functions the applications must support, and came up with 160 services that these functions had to provide, such as enabling customers to check for availability of a BT service. They then began to develop them. Reusability figured heavily in Mr Glass’s strategy. A software service that enabled a customer to check for product availability might initially be used to check for, say, the availability of broadband services within a certain postcode. Over time, however, developers might enhance that service to support other types of product and customer. Consolidating applications is as much a cultural as a technical challenge. Persuading BT’s software developers to adhere to reuse standards was one of the toughest parts of the process, says Mr Glass. He got the go-ahead from management to tie developer compliance into performance reviews and bonuses, which gave his team the power to drive the message home. BT has deployed 61 of the 160 services and has switched off 719 of its software applications. It hopes to close another 1,000 in the next year.

Editor: Robert Orr Art Direction: Erica Morgan For all enquiries regarding Financial Times Insight products, please contact Alastair Mackie Digital Solutions Manager Financial Times One Southwark Bridge London SE1 9HL United Kingdom +44 (0) 20 7873 3000