The business world is being disrupted by the combined effects of growing emerging economies, shifts in global demographics, ubiquity of technology and accountability regulation. Infosys believes that to compete in the flat world, businesses must shift their operational priorities.

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April 16, 2008

The Cancun conundrum….Are we there yet? - Part 2

(Contd...)

Every business' technology landscape have evolved differently adopting different technologies at different points of the technology evolution time horizon. So each business' technology portfolio is in a different stage of technology state (not to mention complexity added by an M&A). So there is no one or finite number of defined paths to migrate to the future state. Picture every individual who wants to head to Cancun living alone in different cities and the airlines industry has the task of transporting them to Cancun. There is absolutely no economy of scale there.

Just like the solution is to have groups of people in a city and provide standardized transportation in and out of the city, organizations will have to migrate to future state standardized platforms. This migration itself could be in baby steps or it could be a "big bang" transformation. While the "how to get there" is a function of the size of the legacy portfolio, size of the organization, mission critical nature of the legacy technology, budgets available for capital expenditure etc.. as long as the "where to get to" is clear and all projects contribute to moving towards the harmonized standardized platform, organizations will eventually get to the standard platform.

Once they are on these standardized platforms there is hope that these standardized platforms will provide logical and natural progression and modernization in the ever changing environment businesses operate and need to adapt to. Implementation today increasingly is through standardized ERP platforms from vendors of the likes of SAP or Oracle. Little wonder these ERP platforms are extremely popular in the market today. Alternatively well orchestrated set of business services enabled through web services is the future.  A radical shift by jettisoning existing legacy technology baggage to altogether leapfrog to the future by switching to "Software as a Service" (SaaS) is an alternative solution for this problem. It is little wonder leading global organizations like Microsoft, Infosys and IBM are significantly investing in SaaS as the future computing platform for businesses. Till then you can be assured that the business community will continue to keep asking "are we there yet!?"

April 15, 2008

The Cancun conundrum….Are we there yet? - Part 1

Consider this…you want to vacation in the much talked about Cancun to explore those mysterious Mayan ruins that always fascinated you. Off you go to your friendly neighbourhood travel agent (err.. ok.. maybe… sidestep.com or travelzoo.com) to help you plan the whole trip. How would it be if the agent told you about the latest and greatest on Cancun, how the trip to Cancun is the soul's journey into the distant past that will transform you as an individual (all right..you get the point...)…but with one catch - he will not tell you nor does he know how to get you to Cancun from where you live today say, Boulder city, CO. He only knows how good Cancun is and why you should vacation there!

While you naturally shake your head in disbelief on the likelihood of such a scenario today, this situation closely reflects today's technology world. Business executives are constantly told how technology can transform their businesses, capture new markets/customers, dramatically reduce their costs, drive step change in their margins etc... There is an endless stream of technology vendors flashing their wares on how their technology can solve world hunger… but with one catch - just like the friendly travel agent they have no idea how to help you move from your existing technology landscape to the promised land. How will a bank with a 52 million customer base move their core banking platform from a legacy Hogan system to a modern world core banking platform with zero/minimal risk? How do you provide a seamless zero downtime transition from an 24X7 anytime anywhere internet banking infrastructure to a modernized platform? How will a transportation & logistics provider transition from a legacy track & trace system that is used by users in 223 countries globally to a modern Transportation Management system? How does a global auto insurance business seamlessly cut-over from a legacy claims processing system to a modern claims processing platform that can cut processing costs into half or automatically detect fraudulent claims through advanced analytics? How does a telecom giant transition risk free from a legacy billing system that processes millions of transactions of subscribers worldwide to a modern billing platform with zero errors?

There are very little standard answers to these questions. This is the question the CIO faces everyday as they constantly juggle the parameters of "more from less" mandate (read less IT budgets than last year but deliver more), risk, performance, regulatory compliance, modernize etc..

The deep chasm between new technology that is available today and the legacy systems is a reflection of the evolutionary nature of technology that is still growing up. An ever emerging set of standards, new sets of platforms, open source-proprietary software dual etc.. is also clear symptomatic evidence of the state of affairs. There is no one automated way to migrate all my bank's customers to a target platform…oops there is not even one single source of customer data in the bank. (A separate solution termed "Master data Management" promises to solve this age old problem. Details of this on how Michael can be stored in IT systems as "Mike" or "Michael" thereby causing chaos in businesses is another day's post). Then there are business processes to be changed, change management, risk management etc.. A consistent clear-cut transformation journey that is robust and risk free is amiss from solution vendors…and herein is the real challenge.

(Contd.....)

Can Contract Manufacturing help automobile companies?

Automobiles companies are faced with the challenge of retaining market share by introducing new models and same time optimize cost to remain profitable. Companies have to think different, and contract manufacturing can possibly be the way to go.

Around 45% of the cost in an automobile company is raw material cost, companies are sourcing globally or looking at alternative material to reduce the material cost, but this may not be adequate. Companies have to look at ways of converting fixed cost to variable and look at ways to reduce time to market. Companies will have to look at their SG&A cost, Capex, Maintenance costs and convert them to variable cost and contract manufacturing is the way to go.

 

Many automobile companies are sourcing aggregates and restricted manufacturing operations to assembly and painting, the next step is to out source the entire production. Contract Manufacturing is successful in some industries like electronics, consumer durables (white goods), but it is yet not popular in auto as this is still considered to be core function. There are some good examples to show that this can work in automobiles too - Magna Steyr is manufacturing for 6 automakers and manufacture models like BMW X3 and BMW Mini.

 

Contract manufacturing can be an excellent option when capacities are a constraint or companies want to reduce time to market or reduce risk while introducing a new model by keeping capex low. It is not as easy as it sounds, there are risks in this too, the contract manufacturer would expect min commitment of volumes and IP protection can be a potential concern. Having said this, these are issue that can be managed and automobiles companies can then focus on core functions i.e. Product development (IP creation) and Brand, the 2 core functions that creates differentiation.

 

If this happens in a big way, then China and India  stand to gain where the cost structures are low, but India stands to gain over china as India had better credibility when it come to IP protection.  

 

 

April 9, 2008

Are Automobile companies doing enough to optimize Cost?

Automobile is a fiercely competitive industry, most companies are struggling to be in the BLACK, Ford and GM are registering losses year after year, but same time Toyota and Honda continue to register profits. What is it  that they do differently? Are there things that we can learn? Yes, Toyota and Honda have managed costs better and use it to fuel growth.

Increased regulations and alternate fuel technology is going to take a lot of investment, therefore companies have to re look at their cost structures and generate enough profits for future investment.

Companies are Outsourcing, Shifting manufacturing facilities to LCC or Contract Manufacturing and benefitting from that, but what companies require is a more wholistic and integrated approach, look at  impact of an activity across the value chain and lifecycle of product.

Companies have to look at every element of cost and look at reducing it, be it product development cost, material cost, inventory cost, marketing cost, employee cost or warranty Cost. 

Let us take a look at the impact of a relatively low cost line item like warranty - the difference in warranty cost as a % of revenue between the best (Toyota) and worst (Daimler Chrystler) is a around 3%, Daimler spent $6.1 bn as against $2.37bn of Toyota, where as  General Motors’ warranty cost was $4.46 bn and Ford $4.10 bn. Toyota clearly saved over $2 billion on warranty alone which it could invest in new product development for e.g Hybrid cars.

Daimler, Ford , GM could add 2 to 4 billion on their bottom line if they managed their warranty cost better (not by reducing warranty term but increasing Quality and Reliability) .

Image the savings that can come from big ticket item. Are companies doing enough? Are they thinking differently? Are they pushing their boundries? Are they thinking innovatively? Are  they collaborating with partners?