thriving in volatile times - deloitte us...• outsource peak capacity to 3 rd party • ensure...

Thriving in Volatile Times

March, 2020

Morten Thorball and Anders Lund

22

Who are we?

MSc Economics

+45 25 61 00 84

[email protected]

Copenhagen, Denmark

Morten Thorball | Strategy & Business Design lead

MA Corporate Comms, HD (MM)

+45 30 93 69 45

[email protected]

Aarhus, Denmark

Anders Lund | Strategic Cost Transformation lead

If a downturn is

happening in the next

few years…

…how do you make

sure that you are

prepared for this…

…and how can best-in-

class cost management

be particularly beneficial?

4Source: U.S. Bureau of Economic Analysis; Deloitte analysis; Note: (1) Since records started to be tracked in 1854.

We are in the longest period of economic expansion in recorded history

5

Almost all downturns of the past 50 years…

Source: Deloitte Analysis

6Source: Deloitte Analysis

… find their origins in 4 main types of root causes

7

The strong interconnections between these root causes explain most systemic crises…


8

… such as the sub-prime crisis in 2007-2008


9

If a recession happens, it tends to last about a year…

Postwar US business cycles by length of recession, months

Sources: Bachman, “What to Expect When You’re Expecting . . . a Recession”; National Bureau of Economic Research; Haver Analytics.

10

… and impact a few sectors significantly harder than others

Average maximum decline in main GDP expenditure categories across all post–World War II recessions percent

Residential investment

Exports

Consumer durable goods

Imports

Nonresidential investment

Federal spending

GDP

Consumer nondurable goods

State and local spending

Consumer services

-22.6%

-13.5%

-9.2%

-9.2%

-9.2%

-9.2%

-2.1%

-1.3%

-1.2%

-0.4%

Sources: Bachman, “What to Expect When You’re Expecting . . . a Recession”; National Bureau of Economic Research; Haver Analytics.

11

The nature/timing/triggers are still very hard to predict…


Conflict with Iran erupts

Pandemic Outbreak (Covid-19)

12

… and the stakes are high in a downturn, where history has favored the prepared

Source: BHI, based on S&P Compustat and Capital IQ data; Note: (1) Average across last four U.S. downturns since 1985, based on performance compared to 3-year pre-downturn baseline for U.S. companies with >$50M in sales; (2)

Annualized revenue growth during the downturn; (3) Compared tot the 3-year average pre-downturn EBIT margin

If a downturn is


few years…

…how do you make

sure that you are





14

Preparing for volatile times is all about building a truly agile and scalable business

A misaligned operating model creates inefficiencies and inflexibility

An aligned operating model is the foundation for scalability and

responsiveness

Operating Model

“How the organization delivers value”

Operating Model

Businessmodel

“How the organization delivers value”

“How the organization operates”

Capital Model“How operations are financed”

Operatingmodel

Operatingmodel

“How the organization operates”

Capital Model“How operations are financed”

Typical benefits from fast transition

• Increase probability of achieving organizational strategy• Improve flow of resources to areas of strategic importance• Achieve greater alignment of business functions

Businessmodel

• Reduce level of cost inefficiencies• Minimize effects of organizational weaknesses• Decrease amount of effort dedicated to non-strategic activities

A scalable operating model rapidly realigns

to the changes a downturn would

put on the business model

and capital model.

15

We have found 6 key levers in preparing for potential changes in the economy

Set the foundation

Defend and drive revenue

Reduce and manage costs

Optimize assets, liabilities, and liquidity

Accelerate digital

Manage expectations

16

Set the foundation: Scenario planning is a key foundational tool for mitigation planning against potential changes in the global markets

Rich, data-driven, stories about tomorrow that can help you make better decisions today!

Hypotheses that describe a range of possibilities for the future — not predictions

Imaginative narratives that stretch thinking, but are always plausible and logical

Together, a set of scenarios form an organizing framework that can be used to make sense of conflicting or ambiguous market signals moreholistically — today, and as they appear over time

Observed Trends and Events

Scenario A

OM

CM

BM

Scenario Planning

Business alignment OM

CM

BM

Scenario B

OM

CM

BM

Scenario C

What is Scenario Planning? Aligning of business with scenarios

17

Offerings

Suppliers

Clients

Ecosystem

Capabilities

…

Implications Success Factors

Set the foundation: Combining scenario-based strategic thinking with cutting-edge Artificial Intelligence

1 2 3 4 5 6

Identifydriving forces

Developscenario model

Determinestrategic implications

Wind tunnel existing strategies

Develop actionable strategies

Monitor and adjust strategy

Deep View Future-Proofing Gnosis.strategy

Critical uncertainty 1

Critic

al u

ncer

tain

ty 2

PerceiveUnderstand your

market and competitors

AnticipateBuild a future-proof strategy

based on scenarios

NavigateKeep your strategy

up to date

18

Set the foundation: Sample driving forces analyses for retail

19

Offerings

Suppliers

Clients

Ecosystem

Capabilities

…

Implications Success Factors

Set the foundation: Combining scenario-based strategic thinking with cutting-edge Artificial Intelligence

1 2 3 4 5 6

Identifydriving forces

Developscenario model

Determinestrategic implications

Wind tunnel existing strategies

Develop actionable strategies

Monitor and adjust strategy

Deep View Future-Proofing Gnosis.strategy

Critical uncertainty 1

Critic

al u

ncer

tain

ty 2

PerceiveUnderstand your

market and competitors

AnticipateBuild a future-proof strategy

based on scenarios

NavigateKeep your strategy

up to date

20

Reduce and manage costs: There is nothing more harmful than a blind, generic blanket approach to cost savings

21

Operating Governance

Transitioning to the optimal governance model that aligns with the organization’soverall business model and achieves maximum resource efficiency across all functions

Service Delivery Model

Clearly defining and optimizing what work is performed, where, with how manyresources and at what cost, resulting in optimal re-alignment of functional staff

Business Process Optimisation

Simplifying, standardising, re-engineering and automating end-to-end processes (e.g.,order-to-cash, procure-to-pay, hire-to-retire) across business units and geographies(including enabling technologies)

OrganizationDesign

Aligning the organizational structure with overall business and operating models;defining required functional capabilities and roles / responsibilities and reducing layers and broadening spans of control

External Spend Management

Aggressively sourcing and managing indirect external spend; applying deep category-specific insights to develop the right program to manage each major spend category

Demand Management

Reducing level of effort through elimination of work (i.e., rationalizing managementreports, standardising master data, harmonizing policies)Tactical

improvement

Strategic, structural

transformation

Reduce and manage costs: Structured offset in 6 levers for efficient cost focus

The 6 levers for efficient cost management and reduction

22

Optimize assets, liabilities, and liquidity: ‘Cash is king’, and especially in shifting economic environments with tightening capital markets

Operational Tactical Strategic Improvement range

Procure to pay (Accounts payable)

• Year-end collections push

• Early payment discounts

• Expedite billing

• Efficient payments and automation

• Utility maximization of payment terms & condition

• Change payment frequency, payment methods, triggers and approval process

• Reevaluate supplier base

• Renegotiate terms and conditions

• Sourcing strategy

20% to 40%

Forecast to fulfillment(Inventory

management)

• Stop/ delay supplier payments

• Reduce safety stock levels

• Focus on S&OP

• Review minimum order quantities/Lead Times

• Make-to-order/ make-to-stock

• Rationalise SKU & Product line

• Storage facilities and locations

15% to 30%

Order to cash(Accounts

receivables)• Sell SLOBs at discount

• Stop/ accelerate production

• Efficient billing and automation

• Proactive collections strategy

• Terms & condition adjustments

• Align sales compensation structure

• Renegotiate terms and conditions

10% to 30%

Operational, Tactical and Strategic actions for improving cash balances

23

Accelerate digital: Our recent cost survey revealed poor adoption/implementation rates of core digital enablers

29% 31% 33% 35%

31% 38% 27% 19%

RPA CloudCognitive & AI BINot implemented but planned In process of implementation

22% 25%

56%38%

56%

22%49%

19%

RPA Cloud

13%

Cognitive & AI

Below expectations Above expectationsAccording to expectations

Global USA

17%

EMEA Nordics

35%49%30%

25%25%

62%49%

27%

50% 32%23%

27% 33%25%

19%

Cloud BI RPA Cognitive & AI

Global reported implementation of technologies (past 24 months)

Nordic success of outcomes

Nordic implementation levels (next 24 months)

End-2-End Process

OpportunitiesTask-BasedAutomations

Hig

hva

lue

oppo

rtun

itie

s

Use Case TargetedAutomations

Multiple tools(RxA+ML+BxM

+CB)

2-3 tools in use(RPA+ML)

Single tool (RPA)

Low valueopportunities

# of opportunities

Level 1Savings: <0,5 FTE per task automated.

Level 2Savings: 1 – 3 FTE per use case automated.

Level 3Savings: 10 – 40 FTE per process automated.

Deloitte’s 2019 cost survey Effect of multiple digital enables in process optimisation

24

Examples of drivers that can enable a more agile and scalable business

Revenue

Cos

ts

Liquidity

COGS

SG&A

• Outsource peak capacity to 3rd party

• Ensure flexible sourcing contract structure with material suppliers

• Strengthen integrated business planning to improve reaction time

• Utilise business process outsourcing (especially on transactional processes)

• Implement cloud based solutions

• Implement cognitive automation programme

• Product and customer portfolio clean-up/simplification

• Implement dynamic pricing models

• Ensure pricing realisation

• Minimise inventory levels

• Tighten payment discipline (AP/AR)

• Delay CAPEX (especially in manufacturing)

If a downturn is


few years…

…how do you make

sure that you are





26

Those that manage costs consistently tends to winO

verh

ead

Rat

io(S

G&

A /

Rev

enue

)

T1 T2 T3 T4 T5 T8T6 T7

0%

25%

50%

75%

T1 T2 T3 T4 T5 T8T6 T7

9.7%

21.6%

0%

5%

10%

15%

20%

25%

Erratic Cost Managers Managers with Consistent CostManagement approaches

Erratic managers with lacking focus on cost ratios are more likely to experiences the roller coaster effect

Managers with a consistent focus are better able to control and continuously decrease cost ratios

0%

25%

50%

75%

Ove

rhea

d Rat

io(S

G&

A /

Rev

enue

) Sha

reho

lder

Val

ue

Incr

ease

(5

Year

)

Succeeding with consistent cost management delivers significantly higher increases in shareholder value

Source: Deloitte case examples and proprietary data set, Institute for Corporate Productivity.Source: Thriving in uncertainty in the age of digital disruption (2017), Deloitte’s first biennial global cost survey report.

27

Start your cost management journey with upgrading your understanding of costs

1) D&A: Depreciations and amortisations should be aligned through allocation to external and internal spend.

COGS

SG&A

Internal spend(salary)

External spend(procurement)

White collar salary

Blue collar salary

Direct spend

Indirect spend

Further classification into specific cost categories for labor costs and dimensions (e.g. E2E processes or functional splits). Process oriented analysis drive significant opportunities

Category specific clas-sification and management of external spend. Data analytics and cognitive insights is key for step changes

28

Survey Respondents &

Population

Process Taxonomy

Setup Activity Analysis Survey

Distribute Survey and Collect Responses

Inputs to Activity Analysis Survey

Survey Communications

Transparency is key in order to drive efficient cost management within internal spend

Analyze Survey Data

Client DeloitteDeloitte digital

enabled

Foundation for decision making on e.g.;• Service delivery, • Span of Control,• Management Layers, • Process Efficiencies, • RPA Opportunities, • Etc.

Developing transparency in internal spend (labor costs)

29

Activity Analysis (ProfileIQ™)

Example: Activity analyses using Deloitte’s digital platform

• ProfileIQ’s activity analysis is the frontier of FTE based activity analysis. It is a complete browser enabled tool making the process for collecting and reviewing data more agile

• It allows for up-to-date tracking of respondent activities ensuring commitment and participation

Data gathering Data analytics and deep insights

Process and site benchmarking

Span of controlProcess based cost baseline

30

Utilising global trained cognitive engines will deliver quick saving opportunities

Upload to Microsite -Upload spend data through a secured CognitiveSpend microsite portal direct to the delivery team

Combine Datasets -Aggregate client files and map spend data to CognitiveSpend’sclassification engine

Classification Assumptions Table –Review areas where ML classification resulted in low confidence to automatically update spend cube

Industry Benchmarking – compare spend volume & supplier fragmentation to peer companies

Purchase Price Variance – pinpoint & evaluate pricing variance by item

Executive Dashboard – Provides ability to view / filter spend by category, supplier, business unit, geography and type (direct / indirect)

Aggregate & Classify Provide Spend Visibility Deliver Actionable Insights

M&A Synergy Assessment Dashboard – Enables rapid evaluation of common categories & common suppliers to identify synergy opportunities

Pre

-C

lass

ific

atio

nP

ost

-C

lass

ific

atio

n

31

Example: Sourcing analyses using Deloitte’s digital platform

Data gathering Data analytics and deep insights

Opportunity assessmentSpend overviewCognitiveSpend™

• Natural language processing and Machine Learning are used to classify complex transaction data.

• Enhanced Spend Visibility – gain faster, more accurate, and more detailed classification; more easily navigate spend by category, supplier, business unit and geography

SUMMING UP

If a downturn is


few years…

…how do you make

sure that you are





It is difficult to make accurate predictions, especially about the future.

“- Niels Bohr

The downturn will happen, but it is hard to predict when, where, what and how significant.

Being prepared means having a scalable and agile business, that is ready to meet the sudden change in demand.

This can be supported,by best-in-class cost management approaches.

thriving in volatile times - deloitte us...• outsource peak capacity to 3 rd party • ensure...

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