Funding Digital Transformation

In today’s competitive climate, companies must disrupt themselves before others do it for them. How do you pay for the transformation investment without risking your current business and revenue streams?

As disruption grows ubiquitous across industries and sectors, CEOs are searching for ways to give ever more demanding customers an intentional and connected experience that builds loyalty and grows profits through new business models. Digital transformation is no longer optional for any business—it’s necessary for survival and growth into the next decade and beyond.

That kind of radical transformation is challenging for any company, and particularly for midsize businesses, says Scott Rankin, partner, KPMG. “Oftentimes, they’ve been doing things the same way for a long time,” he adds. “But when you want to drive significant performance improvement and increase profitability by as much as five percent you need to disrupt yourself—and that often means changing the organization dramatically.”

In other words, you can’t simply make incremental change within your existing operations and ask already overtasked employees to take on additional roles to which they will be only partially committed. “That’s a recipe for failure,” says Rankin. “We advise clients, if that’s the way you’re going to approach this change, think very hard about your commitment because most transformations structured this way do not succeed.”

Rather, the new venture should be set up as a separate, standalone program with a dedicated team, sponsored by the CEO and managed by a senior executive who has the vision and authority to get the project done in a way that does not disrupt the core business, says Rankin. The first task? Making sure you know what your customers actually want and value, based on data from a collection of sources, including extensive customer insights and analysis of competitive offerings.

The results of such fact-finding missions are often surprising, says Duncan Avis, partner, KPMG. Avis worked with a large industrial manufacturer that had long assumed its customers valued price above all, but surveys revealed that, in fact, they prioritized speed and accuracy of delivery. “They had a set of executive prejudices based on experience and history,” says Avis. “But consumer expectations change so rapidly now and they are informed by other experiences they have in the market.”

Paying for Change

Fundamental transformation that will enable companies to meet those rising customer demands won’t happen overnight, and unlike deep-pocketed multinationals, most midsize businesses can’t typically find sufficient cash in the balance sheet to fund a new venture of this magnitude. Raising capital via equity or debt can be equally challenging for a smaller private company.

However, while you may not be able to fund the operation from existing operating income, there are numerous changes you can make to drive incremental profit out of your business to invest in new initiatives:

1. Optimize organizational spans and layers. If you haven’t examined your org chart recently, now would be a good time to take a closer look at how many layers you have and whether you can change reporting ratios to trim fat. You can also collapse roles such as president, EVP, SVP and director, which may have overlapping responsibilities, into one level.

2. Lower cost of goods. If you have not revisited your manufacturer contracts in years, now is the time to let them know what you’re planning. Explain that if they can’t help lower your cost, you can no longer afford to sell their product to your customers.

3. Reduce indirect spend. If, as a manufacturer, you buy packaging from five different companies, go back to those suppliers and let them know you’re reducing the list to two. “So it’s, ‘Give us your best price and we’re going to take the two companies that reduce our cost most dramatically,’” says Rankin. A few pennies per item may sound small, “but when you multiply that through, it actually is material.”

4. Improve warehouse and distribution efficiency. Let your customers know what you’re working toward—improvements that will ultimately make their operations more efficient as well—and see where you might make changes. For example, if you currently deliver a pallet each day to one customer, look into dropping two pallets every other day, reducing drive time and fuel spend.

5. Improve pricing practices. One consumer products manufacturer and distributor learned they had 250 salespeople in the field, each negotiating independently with customers. “So oftentimes, salespeople were giving extraordinary discounts to customers to win business and giving away more money than they had to,” says Rankin. “In that case, it was putting controls, guardrails and measurement around the level of discounting that salespeople could provide.”

Each of these should be viewed through the lens of customer priorities, and cuts should be made with precision rather than across the board. Changing the status quo is nearly always painful—in some cases, it will mean letting go of loyal employees who’ve been with you for years; in others, firing customers you’ve long believed core to your profitability. KPMG Partner Sam Ganga likens it to surgery, noting that it always helps to have a skilled surgeon in the operating room. “If you try to do this yourself, the first incision you make, you’ll say, ‘This is too painful, I’m not doing it.’”

Where companies make the most progress, he adds, is when they have a partner to help them not only identify the needed change, but to resource it effectively, apply vigorous financial discipline and hold people accountable in a meaningful and proactive way. “Too often, people go through the activity, but they don’t get the result,” says Ganga. “Bringing in someone like KPMG will deliver the outcome.”

 

KPMG Mid-Market is focused on delivering solutions specifically designed for mid-sized companies. We leverage our knowledge, broad expertise and relationships to help you navigate today’s evolving challenges and help you break through the barriers that limit your ability to compete and grow. Whether you’re looking to expand your business, optimize profitability, get the right team in place, raise financing or exit—we’ll listen, connect you to the right people and work alongside you to find the answer. For more information, please visit https://advisory.kpmg.us/issues/mid-market.html