accenture - outlook journal q2: a new path to growth - june 2013

accenture.com/outlook | 2013, Number 2The journal of high-performance business

A new path to growth

How to stay a step ahead of changing consumer behavior

PLUS

What’s driving Asia Inc.’s new global push?

Innovation: The Big Bang Disrupters

Restarting enterprise IT

Outlook

OutlookVol. XXV2013, No. 2Outlook is published by Accenture.© 2013 Accenture. All rights reserved.

Editor-in-Chief David Cudaback

Managing Editor Letitia B. Burton

Senior EditorJacqueline H. Kessler

Senior Contributing EditorPaul F. Nunes

Contributing EditorsDavid LightCraig Mindrum

Industry EditorWendy Cooper

Contributing WritersLance EaleyJohn Kerr

Assistant EditorCarolyn Shea

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Chairman & CEOPierre Nanterme

Chief Marketing & Communications OfficerRoxanne Taylor

For more information about Accenture, please visit www.accenture.com.

The views and opinions expressed in these articles are meant to stimulate thought and discussion. As each business has unique requirements and objectives, these ideas should not be viewed as professional advice with respect to your business.

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The Long View

Pierre Nanterme Chairman & CEO Accenture

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Engines of growth

The engines of global growth have always been those companies that outperform the competition year after year, in lean times as well as in flush years. In this issue of Outlook, we take a detailed look at two very different groups of companies to determine why they have been so successful and where tomorrow’s growth engines are likely to emerge. The first group we studied is in Asia. Can the region continue to produce the kinds of businesses that fueled pace-setting economic growth in the past? The article beginning on page 34 chronicles the emergence of a new generation of Asian companies that are following a global trail blazed by corporate giants, first from Japan and later from South Korea. For the most part, these up-and-comers from China, India and other Asian nations are not household names—at least not yet.

The authors (whose work is based on new research commissioned by Accenture and produced by The Economist Intelligence Unit) have dubbed these companies the “Asian globalizers” because of their assertive overseas expansion. But what really sets these companies apart, especially from many of their predecessors, is their determination to build genuinely borderless companies through an emphasis on the people side of running their businesses—on talent, leadership, empowerment and culture. This emphasis could well give these companies a competitive advantage or make them promising partners—or both. For the second group of companies, we looked to Europe, where maintaining growth in today’s volatile economy has been especially difficult. This is true even for leading players in an economy as powerful as Germany’s, where Accenture, in collaboration with the German newspaper Die Welt, has been tracking the performance of the country’s 500 biggest companies for three years. Through this ongoing research (which is the basis for the article beginning on page 82), we have been able to identify the top performers within this larger group, as well as their distinguishing characteristics. We found that the most successful German companies have mastered virtually continuous transformation, thanks to a remarkable agility that allows them not only to adapt quickly to sudden changes

in the economy or the marketplace but also to manage multiple product and technology lifecycles simultaneously. Moreover, this flexibility is matched by a robust but balanced combination of financial, technical and cultural strengths. As you set your own course for growth, I hope you will find the experiences of these dynamic companies useful.

Contents

The transition that enterprise IT is currently undergoing is going to force senior executives to consider anew everything from strategy and mission to infrastructure, applications, security, organization and much, much more.

“A fresh start for enterprise IT” (page 26)

FeaturesMarketing

18 A new path to growth: How to stay a step ahead of changing consumer behaviorBy Paul F. Nunes, Samuel Yardley and Mark Spelman

In their search for high growth, companies today no longer can count on demographic changes or emerging markets. Instead, they must understand and capitalize on a third route that is driving rapid growth in a wide variety of industries.

Information Technology

26 A fresh start for enterprise ITBy Allan E. Alter, Paul R. Daugherty, Jeanne G. Harris and Frank B. Modruson

In the face of rapidly evolving changes in technology and mounting competitive pressure, organizations must hit the reset button for how they use IT. The solution isn’t to bring existing programs to a halt and start over. But it’s almost as bold: restarting IT while in motion.

PerspectiveThe Long View

1 Engines of growthBy Pierre Nanterme

Interview: Felipe Calderón

4 Green Growth: How to manage a false dilemmaEconomic growth and protecting the environment are not incompatible, insists this former president of Mexico. But the need to act is urgent and will require a concerted global effort if the world’s economy is to adapt successfully to future climate change.

Industry ReportRetail

10 Who are the Millennial shoppers? And what do they really want?By Christopher Donnelly and Renato Scaff

The digital prowess and market savvy of Millennials make them a difficult group for retailers to bracket—do they break all the rules, or are they more like other consumers? New research puts to rest a number of Millennial myths and provides insights marketers can use to engage and serve tomorrow’s trillion-dollar demographic.

2 Outlook 2013, Number 2

For additional thought leadership from Accenture, including the Accenture Institute for High Performance and Accenture Technology Labs, please visit www.accenture.com/ideas. For a personalized electronic newsletter tailored to highlight specific industries and issues, subscribe to My Outlook at www.accenture.com/myoutlook.

Asia

34 The human touch behind Asia Inc.’s global pushBy Arika M. Allen, Paul Gosling, Grant D. Powell and Claire Yang

A new generation of Asian companies is going global and actively managing talent, leadership, empowerment and communications to overcome obstacles and drive growth. These culturally savvy leaders are rendering stereotypes obsolete, setting the standard for other Asian globalizers and posing a new threat for established multinationals.

Innovation

46 Big Bang Disruption: The innovator’s disasterBy Paul F. Nunes and Larry Downes

As business costs are driven ever lower, some companies are creating disruptive products that, right out of the gate, are simultaneously better and cheaper than existing products. The upshot? Success for those who play by the new rules of strategy and competition—and disaster for incumbents who can’t adapt fast enough.

Risk Management

56 The art of managing innovation risk By Adi Alon, Wouter Koetzier and Steve Culp

Improvisation and experimentation can lead to big, breakthrough innovation. And innovation, fused with an agile, sophisticated approach to risk management, can create a powerful, value-driving partnership.

Business Process Outsourcing

64 A better way to resolve business conflicts By Anoop Sagoo, Jeremy Oates and Mary Lacity

Having a realistic perspective that life is not perfect is a good thing—whether you’re a service provider or a client. The ability to settle the smaller issues promptly and productively lays the groundwork for dealing with more serious, potentially deal-breaking problems that may arise down the road.

Talent & Organization

74 A healthy talent advantageBy David Smith, Breck Marshall and J.P. Stephan

The challenges are daunting. But by weaving healthcare coverage decisions into their talent strategies, and by managing implications of the Affordable Care Act as a strategic change program, US companies can capitalize on opportunities to create a unique value proposition for current and prospective employees.

Germany

82 How Germany’s top companies thrive in rough timesBy Michael Brueckner, Peter Pfannes and Frank Riemensperger

The most successful German companies continuously transform themselves to increase and maintain overall competitiveness. And they owe this outstanding agility to a balanced combination of financial strength, IT-enabled insight and values-driven leadership.

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Calderón: “Consensus doesn’t mean unanimity.”

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Interview

Felipe Calderón, former president, Mexico

Green Growth: Managing a false dilemma Economic growth and protecting the environment are not incompatible,

insists this statesman. But the need to act is urgent and will require a concerted global effort if the world’s economy is to adapt successfully to future climate change.

It would be only a slight exaggeration to say that Felipe Calderón developed his passionate concern about the environment at his father’s knee. As a teenager in the 1970s, he watched as Luis Calderón Vega, a founder of Mexico’s Partido Acción Nacional, warned his party about the grave impact of climate change, one of the few senior politicians at the time to raise the issue—in Mexico or anywhere else.

Perhaps the most important les-son he learned from his father, the younger Calderón recalls today, is

never to underestimate the ability of one person to effect change.

As Mexico’s energy secretary and later as president, Felipe Calderón emerged as a global leader in fighting the threat of climate change and promoting sustainable human development. In an exclusive interview, his first on Green Growth since leaving office in December 2012, Calderón sat down with Peter Lacy, managing director of Accenture’s Strategy and Sustainability businesses in the Asia Pacific region, to discuss Green Growth,

the efforts to date to address climate change and the outlook for the future.

PETER LACY: One of the defining themes of your public life, both domestically and globally, has been Green Growth. What does Green Growth really mean?

FELIPE CALDERÓN: I always depart from a false dilemma. During the last decade, nations and governments believed that it was not possible to achieve two goals at the same time, that growth and protecting the environment

Interview


were incompatible. That is a false dilemma. It is possible to make economic growth and the protection of the environment compatible; it is possible to tackle poverty and, at the same time, to tackle climate change. The mix of policies—all those policies to tackle climate change and, at the same time, to produce economic growth—is Green Growth, in my opinion.

Finding the way to make economic policies compatible with environ-mental policies is probably the most important challenge for human beings in this century. I know that given the current international economic situation, it is really difficult to also think about climate issues. But the fact is, sooner or later, we will need to face the problem—not only the environmental problem itself but the economic problem of adaptation to climate change in the future.

Can you give us some examples of how you managed that false dilemma when you were president of Mexico?We tried to apply policies that could be understood by people, companies and the government. A lot of people inside the government actually don’t believe in the challenge we have ahead.

One example: a massive program to substitute all appliances for new appliances, mainly refrigerators and air-conditioning equipment, to reduce carbon emissions from domestic sources. We were able to exchange more than 2 million refrigerators in three years. We pioneered a mix of public policy, small subsidies to the very-low-income families and an affordable credit program for everyone.

Secondly, the so-called green mort-gages. In Mexico, the low-income families, especially low-income workers, have access to mortgages. But it was impossible to reach the workers below a certain income level. We started a new program—again, not only with the affordable mortgages but also with upfront subsidies, a down payment for all those workers earning minimum salaries or less. All those mortgages—and we are talking about half a million a year—are provided on the condition that the house they are buying has some kind of innovative energy-saving mechanism. It could be solar panels for heating water, whatever.

Another example: the public sector itself, PEMEX [the state petroleum company]. We established clear and concrete goals for payments to reduce carbon emissions, for instance. Another is regulation. We are establishing better parameters for the vehicle industry. Another is promoting mass transit in some cities. We are preparing—through the public works bank or infrastructure banks and other development banks in Mexico—affordable credits for municipalities. They can promote public/private projects related with mass transit in order to reduce carbon emissions.

One of the barriers often cited to doing more in this area is vested interests— groups that stand to be disadvantaged by regulation—slowing down the process. Often, the argument is about whether or not it makes you non-competitive compared to other countries. How did you tackle that issue? It is very important to understand the companies’ point of view, and they have a point. The question is, how can we apply neutral policies in order to avoid these kinds of

“ It is possible to act, in a very modest way, in your space, your own country, your own government.”

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biases, or these kinds of situations of one company or one country fulfilling the new regulation about the environment and suffering a loss of competitiveness as a result? At the national level, we need to involve the industries in the general discussions.

It’s not enough to try to wake up some kind of national commitment to the environment. Something else is needed, and that could be the right economic incentives for all those interested. And that could be related to taxes, for instance, or some kind of policy which gives incentive for saving energy.

How did this work in Mexico during your administration? One example: At the beginning of my administration, there were no wind farms. In Mexico today, we have 3,000 megawatts from wind and a growing number of projects. Some of them are made by private companies. We provided them with the right incentives. We are not pay-ing any subsidy, but we facilitated their access to the grid in a more competitive way and more affordable way, because it’s a public utility.

But there is no one-size-fits-all-industries approach, right?We need to establish some kind of order for the measures we will apply at the aggregate level. My point is this: It is very expensive, for instance, for a company which is on the frontier of technology to make marginal reductions of carbon emissions, and that could be very expensive for some industries. However, there are other projects where we can get a lot of advantage in terms of carbon reduction. One of the most important tasks for the international community is to detect what projects are more

viable than others for reducing more carbon.

What sort of progress is being made in this area?There is some interesting research that is estimating the net present value of the grid measures. It’s clear, for instance, that energy-saving programs for energy- intensive industries are not only good for the environment but are also absolutely viable in financial terms. In other words, that kind of measure applies not only to carbon reduction but also to profits for the industry. We need to establish the right public policies and economic incentives in order to move the companies to take those measures to reduce emissions.

If we are able to make the right estimation of the net present value of different projects related to saving energy or reduction of carbon emissions, we could make the first step. Someone did research in Mexico; they found that there are 140 projects in which the net present value is positive.

It sounds like companies and governments can work together in some sort of win-win dynamic.Industry could do a lot or govern-ments could do a lot. But all those efforts imply not only a reduction in carbon emissions but also profits or cost savings for the companies—or for the governments. If we start with that, we can reach a better . . .

. . . price/efficiency equivalent?Yes. We are not going into very expensive measures for the companies, but we are gaining in terms of the environment, and the companies could get money from those measures.

From your experience, what would you advise other policy makers to be doing—or not doing—to drive Green Growth successfully?A lot of people don’t realize that this is a serious issue. Unfortunately, for a lot of leaders in the world, climate change seems like a very naïve way to lose money. It is a very pragmatic arena—political pressure, public opinion, jobs, the performance of the government— for thinking about climate change. But we’re losing time. We need to switch that mentality, and that is the most urgent task we have ahead.

In order to do so, we need to emphasize and repeat the issue at every single meeting. I tried to do that, and in every single meeting, I was talking about climate change, I was talking about the government responsibilities.

Let me be honest. I remember when I went to Canada, the prime minister said in a press conference, when he was asked about climate change, that it was clear that the United States was not taking any position or any commitment by now, so his government had to wait for the American decisions in order to take our next step. I was there, and I said to the prime minister we could see that the American congress and government were not making any decisions, but we couldn’t wait for the American decision. It was a little bit painful for him, in Canadian public opinion, but it is the only way to wake up that issue.

By calling it straight.Yes. We need to put some political incentives on track.

You have played a critical role in the last few years in trying to build bridges, broker deals on climate change. What did you learn that you

Interview


“ We can cut [the United Nations’ budget] and allocate half of that to the environment, and we can fix the problem, at least for the next 10 years.”

think should be factored into future UN negotiations, as we try to build a global architecture for dealing with climate change?First, we need to understand that consensus doesn’t mean unanimity. We need to break that kind of tricky bet coming from some countries. We need to move ahead—over them, if you allow me to say that. We cannot be blocked every single day, every single year, by the same guys.

Secondly, we need to change the mechanisms inside the United Nations. I do believe in diplomacy, but the bureaucracy and the orga-nization itself are not working. We need to think seriously about that. I remember when we had a discussion with the secretary general, or his staff, [and] I asked them what the budget of the United Nations was. It’s an incredible figure—I can’t even remember, but it was billions. Well, we can cut that, and we can allocate half of that to the environment, and we can fix the problem, at least for the next 10 years.

What was their response?Wow. Well, of course, they got angry with me, and they hated me a little bit. But it’s true. If you go to the United Nations assembly, you can see a massive bureaucracy doing nothing. We need to think in a very different way; we need to change the United Nations itself.

What are the lessons of the Kyoto Protocol?That we also need to think about new mechanisms even inside the diplomacy itself. Kyoto was a marvelous, amazing agreement in its time, but ultimately, it was a tremendous failure.

In the Kyoto Protocol, there are commitments from developed

countries for some amount of tons of carbon. However, from a different angle, we on the negotiating team at the COP-16 climate change negotiations established unilateral, non-binding commitments from developing countries. These public commitments are, by far, larger than the commitments made in the protocols. I’m talking about twice the millions of tons of carbon emissions reduction commitment than the Kyoto Protocol. And we need developing countries to join the fight because they account for a larger proportion of carbon emissions every day.

We also need to be more creative and think of other mechanisms to tackle climate change. That could be carbon sequestration, for example, not only to figure out this technical mechanism to sequester carbon, but all these green projects, literally green projects, related to plantation, forestry, the REDD mechanism [the United Nations Collaborative Programme Reducing Emissions from Defor-estation and Forest Degradation in Developing Countries].

It’s a key issue—why? Because, in my understanding, reduction of emissions in industry is more related to developed countries, but carbon sequestration is more related to developing countries. And the economic capabilities and the potential growth are in developing countries right now. So we can shift and focus on developing countries, and towards carbon emissions or sequestration of carbon, instead of or as well as carbon reduction.

When you think about what’s required to deal with climate change—what we know about the science, what we know about the need for speed, for scale—are you hopeful?


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I know it is difficult, but I realize that today, the economic circum-stances are the most important obstacle to a commitment for a lot of countries. However, that will change. Sooner or later, Europe is going to start to grow again. The United States, in one way or another, in a good way or a bad way, will fix its deficit. And in the future, we will be able to catch again the attention and the commitment of everybody.

Is Green Growth the way to do that? I don’t want to create, even for myself, huge expectations about that. But the only way to preserve our hope is to insist on that, is to work on that on a daily basis.

You have been recognized as a UNEP Champion of the Earth and have earned all sorts of other accolades since your term as energy minister and then as president. What would you want your legacy on Green Growth, on sustainability, to be?I have fought to create the mecha-nisms that make this tremendous effort we need to do viable. One mechanism is Green Growth itself. The other is to rescue diplomacy, to allow it to establish a serious commitment on a global level. I am trying to wake up the global conscience about the problem. Of course, we need to work a lot, and today, we are far away from concrete action on a global level— at least [from] what is required. However, it is possible to act, at least in a very modest way, in your own space, your own country, your own government, your own policies.

Even on a personal level. One of my hobbies, for instance, is to plant trees. I really enjoy that. For a number of years, I have had

a barbecue with my friends, [where] I invite them to plant trees—hundreds of trees, thousands of trees.

They work hard for their barbecue.Yes! Actually, today, I am enjoying the shade of some of the trees.

This is a very personal, even emotional, issue for you. Where does the passion come from?Let me tell you this story. When I was born, my father was 51 years old. He was almost my grandfather. In the ’70s, for the first time in my life, I listened to him talk about the environment, some kind of climate change. My father started to talk in the assembly of the party about the future. He was saying that the poles will melt one day, the levels of the seas will increase, there is some kind of acid rain that is causing a lot of damage, and so on. And even some of his best friends at that time started to say, well, what happened to Luis? He’s losing his mind, he is very old.

That was very early for a senior politician to be raising this issue.Yes, it was the ’70s. I had never heard about it. Most of the people said my father was crazy. But I learned from him, in the sense that I learned you are able to start a change. Something will happen. Maybe you fail, but if you don’t start things, those things will never happen, ever. So, I started that.

He clearly had a big influence on you.Sometimes, we never realize the size of our own influence. But we need to try. The surprising thing is there are more people waiting for the right thing, or the right measures, so you need to try.

We need to fix these problems. There is a lot of money in the

world right now, in pension funds, sovereign wealth funds and so on; and, on the other hand, there are a lot of needs in terms of green projects. The same with infrastructure projects. The key issue is how to match that. We need to find the right instruments and the viable projects to do so.

Who are the Millennial shoppers? And what do they really want? By Christopher Donnelly and Renato Scaff

Industry Report | Retail


The digital prowess and market savvy of Millennials make them a difficult group for retailers to bracket—do they break all the rules, or are they more like other consumers? New research puts to rest a number of Millennial myths and provides insights marketers can use to engage and serve tomorrow’s trillion-dollar demographic.

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But are Millennials really a unique new breed of plugged-in, networked savants? Or do these prized con-sumers share critical similarities with previous generations?

To find out, Accenture conducted proprietary global market research on the shopping behaviors of 6,000 consumers, of which 1,707 were Millennials, across eight countries (see sidebar, page 16). We also looked at the capabilities of 60 retailers worldwide to determine whether they were providing the customer experience this generation demands.

To give some idea of the stakes involved: There are roughly 80 mil-lion Millennials in the United States alone, and each year they spend approximately $600 billion. While originally typecast as financially dependent teens, today’s Millennials include young adults in their 20s and 30s. Many have careers, are raising kids and live in their own homes. While Millennials are already a po-tent force, they will truly come into their own by 2020, when we project their spending in the United States will grow to $1.4 trillion annually and represent 30 percent of total retail sales. Millennials will have a major economic impact in other markets our research covered as well.

Although Millennials have earned a reputation for viewing the world through a uniquely digital lens, our results found some remarkable similarities between

them and their predecessors: the Baby Boomers (born from 1946 to 1964) and Generation X (1965 to 1979).

• More than half (55 percent) of the survey respondents, in all three demographics, said that they seek out “the cheapest return option.”

• Forty-one percent of all three groups said they practice “showrooming”—examining merchandise at a nearby retail store and then shopping for it online to find the lowest price—more often than they did a year ago. This shift is due, in part, to the current high penetration levels of smartphones, which can enable customers to search for an item easily, even while in a store.

• Thirty-six percent of those surveyed from all three generations said they will go online to buy from a retailer’s website if they want a product when the company’s stores are closed.

• On average, 89 percent said having access to real-time product availability information would influence their shopping choices in terms of which stores they would frequent.

The many similarities we found across generations led us to challenge three enduring myths about Millennials.

Millennials—born between 1980 and 2000— are both the 20th century’s last generation and its first truly digital one. This old century/new technology dichotomy gives pause to marketers attempting to understand and connect with this key demographic.

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Myth #1: It’s all about online shoppingMillennials are certainly very savvy online customers, but that doesn’t mean they’ve stopped frequenting brick-and-mortar venues. In fact, interviews conducted recently at one of America’s largest shopping malls confirmed our survey findings that many members of the digital generation actually prefer visiting stores to shopping online. What’s more, our research findings in the United States were reflected in the other countries where we surveyed as well. Echoing countless generations of canny shoppers, one Millennial told us, “You want to touch it; you want to smell it; you want to pick it up.”

Make no mistake: Online and mobile channels are important to Millenni-als, providing the information and insights they need to find the best products and services. Many hone their shopping skills on the Internet, checking product ratings and reviews or feedback on retailers, for example, to confirm that both

product and vendor provide the best value and service, respectively.

One challenge for retailers is the Millennials’ seemingly omniscient grasp of prices and promotions, which this generation expects to be the same in stores as they are online. To cash in on in-store retailer promotions, Millennials also want mobile coupon scanning capabilities, and having to print out coupons prior to shopping could be a deal-breaker. One summed it up this way: “When I get to the store, if I haven’t printed out my coupon and I can’t use it, I walk out.”

When it comes to shopping, we found that 68 percent of all Millennials demand an integrated, seamless experience regardless of the channel. That means being able to transition effortlessly from smartphone to personal computer to physical store in their quest for the best products and services.

Myth #2: Loyalty is lostIn a recent survey of retail industry leaders, nearly 40 percent said the No. 1 concern they have about Millennials is their lack of loyalty. But we found that Millennials can be exceptionally loyal customers—provided they feel they’ve been treated right.

They demand a customer-centric shopping experience—one tailored to their wants and needs as valued customers. As one shopper put it, “You want to feel welcome when you go to the stores.” In describing the ideal shopping experience, a Millennial noted,

“There is [something] about the product and its cost, but there’s also a big part about being treated like a valued customer.”

Many seek personalized, targeted promotions and discounts as the price for their loyalty. “Loyalty programs are big,” confirmed one interviewee.

We found that 95 percent or more of Millennials say they want their brands to court them actively, and coupons sent via email or mailed to their homes currently (or will in the future) have the



Although Millennials are masters of social media, they view Facebook and other sites differently than many marketers may assume, which can lead to misunderstandings.

While clicking an icon on a social network page might indicate that they consider a retailer or brand cool or hip, that doesn’t necessarily mean they are loyal customers. “I really don’t follow my retailers on Facebook or Twitter,” said one. Instead, they view social media rela-tionships with brands and retailers as transactional. “Social media? I use it to get deals,” offered another.

Marketers, who are relentless scorekeepers, can easily mistake a pressed “like” button for far more than it really is—which, from the Millennials’ perspective, is basically a way to find the best offers. “I do ‘like’ certain retailers on social media,” one Millennial noted, “especially if it gives me access to coupons or deals or more informa-tion. [Otherwise], I would have to be pretty emotionally moved to just ‘like’ [a retailer] for no reason.”

To reach Millennials on social media, a brand or product must become a routine part of their conversations concerning product information, updates and special offers. “It’s not like you’re communicating a deal to [your friends],” one person explained. “It’s more like, ‘Hey, I got this new thing, this new toy.’ ”

The goal should be to create positive buzz, to be talked about by Millennials. Simply having a presence on social media isn’t enough—the aspiration should be to become the topic of conversation for all the right reasons. Contrary to the famous public relations maxim that all publicity is good publicity, many firms have found, to their regret, that the negative online buzz they are generating can zap both brand strength and sales. Instead, companies need to engender the type of positive online buzz that can lift brands and sales alike.

Our research also highlighted the quicksilver nature of social media. Although Facebook remains by far the largest social network in the world, Millennials—perhaps as a bellwether for the actions of other generations—have begun to move on. “[Facebook has] kind of died down,” shrugged one. Others listed their Facebook alternatives: Twitter, LinkedIn, Tumblr, Pinterest and more. For retailers, this proliferation means that where the conversation takes place is constantly evolving. Next year, it could be an entirely new site; in five years, the social media channel itself could morph into a completely different form.

Driven by the Millennials and future digital generations as yet unnamed, we believe retailing will change more in the next five years than it

Myth #3: Millennials treat retailers and brands the same as people on social networks

most influence on them. Other channels, such as text messages, have an influence on just over

half of all respondents in terms of their shopping behaviors.

(Continued on page 16)


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Source: Accenture analysis

68%prefer shopping in

consumer electronics stores

91%prefer shopping in drugstores

84%prefer shopping

in department stores

80%prefer shopping in

apparel stores

prefer shopping in discount/mass merchant stores

83%

Myth busting Millennials still like brick-and-mortar stores. In fact, 82 percent of them prefer bricks and mortar.

37%will buy the item from

the retailer online

28%will return to the store

the next morning

4%will buy the item via

the retailer’s mobile app

Millennials can be exceptionally loyal customers: 69% say that when it comes to their favorite retail store, a “closed” sign does not change their minds.

28%will make a purchase due to a social media recommendation

It takes more than Millennials liking a brand or a retailer on social media to make them loyal customers.



has in the last 50. That’s because consumer uptake of new communi-cation technologies has continued to compress over the past 125 years.

Look at radio: It took more than 30 years to achieve a consumer adoption rate of 50 percent. Mobile phones took only 15 years to reach the same level, and social media, a mere 3.5 years. The message for retailers is simple: While you had literally decades to perfect your radio-era go-to-market strategy, with social media you will be lucky to get a year, and in the future, a year might be a best-case scenario.

Unfortunately, our research shows that retailers are currently under-delivering when it comes to the demands of Millennials. When Accenture evaluated more than 60 global retailers to understand how seamlessly they deliver the customer experience, we found that most of them had big holes in their approaches.

We have identified six dimensions as contributing to a seamless retail experience. Today, most retailers are making headway on only two: providing a consistent cross-channel experience and offering personalized interactions. The other four—connected shop-ping, integrated merchandising,

flexible fulfillment options, and the capabilities and enriched services that help make the overall shopping experience better, faster and more memorable—remain works in progress.

Becoming seamlessWe define seamlessness as the ability to deliver a consistently personalized, on-brand experience for each individual customer, at every touchpoint—anytime and anywhere. A seamless customer-facing retail experience will typically include the following four compo-nents (see chart, page 15).

• To reflect customer demand, retailers need to customize their

About the researchTo bring the needs of Millennial consumers and their potential impact on retailing into sharper focus, Accenture undertook a three-pronged research initiative that included a major, multicountry online consumer survey, a global retailer benchmarking study and face-to-face interviews with 50 individual consumers.

Consumer survey. We conducted an online survey of 6,000 consumers, of which 1,707 were Millennials, across the United States, the United Kingdom, Germany, France, Sweden, Japan, China and Brazil.

Retailer survey. The second element of the research was a benchmarking survey involving 60 global retailers that focused on six capabilities and asked 80 questions. The six capabilities are:

• Providing a consistent customer experience regardless of channel.

• Offering connected shopping that allows customers to move seamlessly across channels to fulfill a single shopping mission.

• Developing integrated merchandising skills, which requires retailers to provide an integrated product assortment and unified pricing across channels.

• Putting in place flexible fulfillment and returns procedures that offer customers multiple convenient options.

• Enabling personalized interactions through which retailers effectively engage customers to offer the dynamic, accessible and continuous shopping journeys, whether in-store, online or via a mobile device, consumers desire.

• Providing better, faster and more memorable customer experiences.

Accenture matched the consumer and retailer benchmarking surveys on a one-to-one basis to evaluate what is important to customers compared to what retailers are actually delivering.

Face-to-face interviews. To bring the survey findings to life, we interviewed about 50 randomly selected consumers at the Woodfield Mall in Schaumburg, Illinois.

(Continued from page 14)


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offerings across channels in the ways Millennials want, which typically boils down to providing better, faster, more memorable service.

• Retailers also need to integrate their operational elements so that they can have a single “conversation” with customers, not one that changes from smart-phone to PC to physical store.

• IT platforms should be integrated to unify their sources of data and boost cross-channel transparency.

• Finally, retailers will need to team up with technology, data, analytics and process partners to provide the service performance Millennials want, since they will not be able to deliver it all themselves. As a result, successful players are collaborating to strengthen their customer value propositions. For instance, a third-party logistics provider can supply same-day delivery services for online purchases, enabling retailers to offer a service customers want without having to invest in an expanded delivery fleet or new routing capabilities.

To improve their capabilities as a seamless organization, we suggest that retailers consider the following five steps.

• First, integrate the company’s merchandising and marketing departments with a unified position, making the customer experience just as important as product and price considerations within the company.

• Second, retailers should consider ways to consolidate single channel teams in order to serve customers

on an end-to-end basis across the enterprise.

• Third, retailers can organize their store employees on two specialized tracks, one tasked to serve customers and the other focused on fulfillment, since the two disciplines differ dramatically from each other.

• Fourth, companies should explore ways to evolve their supply chains to gain the capability of managing their inventory holistically. That means “forward” to the stores, “backward” for returns and “sideways,” which involves sourcing from other stores.

• Finally, many retailers should think about how to expand the metrics they use to keep track of the company’s customer handling performance, as well as the incentives that drive it. Normally, retailers look at same-store performance, but that dynamic changes when companies use stores to fulfill orders initiated online. Questions arise, including which channel should receive credit for the sale? Who covers the cost of fulfillment? And how do you encourage stores to support these shifts when each is respon-sible for its own profitability?

Our research shows that Millennials are not only transforming their own shopping behaviors but those of their parents, who are increasingly mimicking the demands of their children for seamlessness as they climb the digital learning curve. One consequence of this evolution is that the retail environment will probably change faster than many companies expect in the coming years, and many retailers will find themselves falling further and further behind.

That’s because delivering products and services in a truly seamless fashion will require companies to make profound changes across their entire organizations—changes that many seem either unprepared or unwilling to make.

To close this emerging consumer generation gap, retail leaders need to take action now to provide the seamless end-to-end experience Millennials demand.

About the authors

Christopher Donnelly is the industry managing director of Accenture Retail. He is based in [email protected] Renato Scaff is an Atlanta-based managing director in Accenture [email protected]

For further reading

“Shoppers without borders,” Outlook 2012, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-shoppers-without-borders-retail.aspx

“Serving the nonstop customer,” Outlook 2012, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-serving-the-nonstop-customer-marketing.aspx

“Harnessing the power of social media,” Outlook 2011, No. 1: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2011-harnessing-power-social-media.aspx

For more related content, please visit www.accenture.com.

A new path to growth

How to stay a step ahead of changing consumer behaviorBy Paul F. Nunes, Samuel Yardley and Mark Spelman

In their search for high growth, companies today no longer can count on demographic changes or emerging markets. Instead, they must understand and capitalize on a third route that is driving rapid growth in a wide variety of industries.

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Marketing

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According to that index, companies will have to grow collectively by 4.7 percent in 2013 and again in 2014 to justify their end-of-2012 share prices. That’s a tall order, considering that GDP growth in much of the developed world was low or even negative for 2012.

To fulfill the market’s expectations, business leaders must find new sources of growth that are both significant and attainable—because for many companies, the search for fast growth has hit a wall, rosy interpretations of the S&P notwithstanding.

Won’t emerging markets save the day? Don’t hold your breath. India’s growth rate in 2012 was its lowest in a decade, and Brazil’s has declined significantly over the past three years. There remain a few hotspots (see chart, page 23), but not enough to provide all of the growth that companies need. What about significant new growth driven by demographic shifts, such as aging populations? Also unlikely; many companies are still wrestling with how to turn these shifts to their advantage.

Where, then, will companies find the next major opportunity for above-market levels of growth?

Targeting behavior Accenture research points to an area so old it is once again new: changing consumer behavior.

How is consumer behavior changing? Consider just a few examples: the professor in Stockholm who checks her email before bed and, when she finds an invitation to

a conference in London, immediately goes online to buy airline tickets from a travel site; the young tech worker who gets his first job in Silicon Valley, sells his beat-up old car and then signs up for a car-sharing service for those times when he needs personal wheels; or the mother in São Paulo who chooses a particular brand of paper products for her family because they were produced with sustainable methods.

These examples, and others like them, all point to increasingly prevalent changes in consumer behavior that Accenture identified in a 2012 survey of 10,000 online consumers in 10 countries.

Such changes are of more than academic interest. We hypothesized and then demonstrated that targeting changes in consumer behavior—such as the increasing focus on environmentally safe products or a greater emphasis on seeking unique experiences—lay behind many of the world’s fastest-growing industries and successful companies. That led us to analyze 20 of the industries and sectors associated with targeting behavior changes—including, for example, video on demand, fair trade goods, low-cost airlines and digital music.

When we ran the numbers, we saw that market size for just that group of 20 industries is projected to more than double, from $2 trillion in 2012 to $4.5 trillion by 2016, with an expected compound annual growth rate of more than 20 percent. That’s three and a half times faster than the projected growth in emerging economies,

Is robust business growth on the horizon? The S&P Global 1200 would have you think so.

21


and more than 10 times the projected rate for advanced economies, over the same period.

Are companies fully prepared to capture that growth—or, indeed, to add on to it? To answer that question, we studied the world’s 3,000 largest public companies, identifying those whose median revenue growth most exceeded their industry peers in the past three, five and 10 years.

Many of the growth leaders have been serving new customers in emerging markets, in both B2C and B2B markets. But roughly a third of the leaders have achieved their accelerated growth by meeting the needs stemming from changing consumer behavior. By studying this specific set of companies in greater detail, we were able to identify three common elements behind their success.

Increasingly, executives need to understand not just who their customers are and where they are located, but also the methods and motivations behind their consumption.

Thanks to technology, consumers are better informed about the products that interest them and the companies that make those products. They also have unprecedented access to products and services. They often remain “in the channel” as they ponder purchases online, even as they shop multiple vendors. This represents a significant change in the “how” of consumer behavior.

Also changing is the “why” of buying and consumption. Consumers make choices not only to improve their material welfare; they increasingly do so to improve their physical and mental well-being. In our survey of 10,000 online consumers in 10 countries, we saw that consumers increasingly fit into 10 dimensions: connected, social, co-productive, individual, experiential, resourceful, disconnected, communal, conscientious and minimalist.

From “where and when” to “how and why”

Networked

Connected Ensures they are always “on,“ continuously in a channel

Social Uses digital technologies to interact with friends, family, strangers, institutions

Co-productive Plays a role in production through design or by providing data to companies

Independent

Individual Values uniqueness and luxury, seeks to express their personality

Experiential Desires new experiences, attends live events, shares experiences with friends

Resourceful Works hard to get ahead, shrewd with money

Disconnected Tries to switch off, break from tradition

Cooperative

Communal Participates in society, with a strong group ethic

Conscientious Buys local, makes rather than buys, considers the environment before purchase

Minimalist Places access above ownership, happy to purchase second-hand or reuse


Marketing


Many companies are getting much better at understanding customers by using analytics and, more important, by using data-derived insights to design and improve the customer experience. Such capabilities are critical in realms such as enter-tainment, where experience is king.

Consider gaming company Activision Blizzard, which has drawn on a deep understanding of consumer preferences. The company grew steadily as a developer of video games from its founding in 1979 through 2007. But its 2008 merger with Vivendi—which included Blizzard Entertainment, publisher of such massive gamer hits as World of Warcraft—set it on a path to greater success.

In 2012, Activision partnered with a couple of analytics firms to test and improve its gameplay in real time. One firm captures data on 190,000 games and 250 million consumers daily, data that Activision can use

to effectively launch mobile games from third-party developers. The second has a leading platform for in-game behavioral analytics and will help Activision “balance and optimize” games in real time, in the words of one executive.

Activision has also used what it gleaned from analytics to successfully enter the mobile games market. Although many gamers remain loyal to their trusty consoles, the company recognized that mobile gaming has been gaining market share. To meet this challenge, the company is developing new technologies to tailor mobile games for its customers.

For the mobile game Skylanders Cloud Patrol, Activision tracked the way players were using characters; when executives realized people weren’t changing from one character to another very often, they adapted the game to give each character specific

powers. Activision also used analytics to experiment with versions tailored to different countries in order to understand how and where to adjust the game.

The key to Activision’s success has been its adherence to the quality of the experience. Instead of flooding the market with mediocre titles, the company concentrated on developing a reputation for delivering a few high-quality blockbusters.

By spending a great deal of time with focus groups and testing ideas on key audiences to tease out the nuances of consumer behavior, Activision’s business intelligence group is able to study what its audience likes and dislikes. This approach highlights a key element of an analytical toolkit: the ability to hire, retain and train in-house analytics talent.

2. An adaptive mindsetConsumer-led growth leaders see disruption as an opportunity. They instill a mindset attuned to perpetual change that allows many of them to shape their industry’s long-term direction.

Creating a corporate mindset that is aware of and open to ongoing business-model and technological change is extremely difficult. The companies we observed that had suc-cessfully instilled an early warning, adaptive mindset were especially good at detecting threats at the edge of the radar screen. They were also masters at quickly coming up with innovative responses to disruption.

Car-rental company Hertz has a history of identifying and embracing change. A few years ago, a thorough examination of its industry spurred Hertz to attempt to capture an increasingly important type of consumer at the edge of its mainstream business—what we call the minimalist, who, in this particular case, is an urban consumer who

spurns car ownership in favor of car sharing.

In 2000, when Zipcar entered the market, car sharing was a barely discernible feature on the car-rental landscape. Since then, however, the business model has established itself as a phenomenon with significant potential for high growth. This came into sharp

1. An analytical toolkitConsumer-led growth leaders use advanced analytics to identify and bridge gaps between their businesses and consumers.


23

Source: Oxford Economics; Accenture analysis

Catching the next waves of market growth Rapid economic and consumer spending growth can still be found in relatively undervalued emerging markets. For example, forecasts for what we call Horizon 2 markets, such as Indonesia, Mexico and Turkey, show compound annual growth rates of between 3.7 and 5.8 percent.

Private-consumption growth: Compound annual growth rate versus absolute growth, 2010–2020102 countries

Horizon 2

Western Europe

Zambia

Senegal

Ukraine

United Kingdom

JapanGermany

FranceSpain

Australia

Canada

Mexico

Turkey

NigeriaKazakhstan

Angola

Qatar

Cambodia

ItalyIreland

India

United States

Indonesia

Russia

Brazil

South Korea

China

BRICs

Horizon 3

Other advanced

10,000,0001,000,000100,00010,0001,000

9

11

3

8

4

6

5

7

0

10

2

1

CAGR

, priv

ate

cons

umpt

ion,

%

Absolute growth, private consumption, $ millions

focus for Hertz when the CEO’s son returned from college singing the praises of Zipcar.

Hertz rolled out its own car-sharing business in 2008. The outfit—now called Hertz On Demand—began modestly, with a business model similar to Zipcar’s, offering hybrids, electric cars, luxury cars and other options for round-the-clock short-term usage with hourly rental fees that included gas, insurance and roadside assistance. By 2012, Hertz On Demand had grown to 130,000 members and had projected revenues of more than $30 million. Hertz has also signaled its dedication to the minimalist consumer through

acquisitions: In 2009, it acquired Paris-based Eileo, a firm with expertise in developing car-sharing technologies, and in 2010, it acquired Flexicar, a leading car-sharing company in Australia. Another key to the adaptive mindset, especially in response to potential disruption, is lateral thinking—that is, seeing opportunities outside your core business.

Education giant Pearson saw digital disruption as a sizable opportunity to better serve students and teachers, so the company revamped its offerings to accom-modate what we describe as

Marketing


In the successful companies we observed, two hallmarks identify the agile organization. They respond to change rapidly, through acquisitions and invest-ments. And they learn quickly from the changing environment, immediately sharing what they discover with stakeholders.

Online auctioneer eBay’s early recognition of what we call resourceful consumers—thrifty types who use online platforms to buy used products or to sell directly to other consumers—

backed by an aggressive, rapid-response acquisition strategy, is a perfect example of the first hallmark. In 2000, newly launched e-commerce business PayPal, with its popular peer-to-peer electronic payment system, averaged about 50 times more payments per day than eBay’s proprietary online payment offering. In 2002, eBay completed the acquisition of PayPal. Following the acquisition, PayPal grew rapidly within the auction site; up until the global economic recession in 2008, eBay’s payment business grew

For further reading

“Serving the nonstop customer,” Outlook 2012, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-serving-the-nonstop-customer-marketing.aspx

“Corporate agility: Six ways to make volatility your friend,” Outlook 2012, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-corporate-agility-six-ways-to-make-volatility-your-friend.aspx

“Energizing Global Growth: Under-standing the Changing Consumer”: http://www.accenture.com/us-en/Pages/insight-energizing-global-growth-changing-consumer.aspx


3. An agile organizationConsumer-led growth leaders react flexibly to changing consumer behavior, scaling offerings rapidly after identifying a successful response.

connected consumers, who are always online, connected via a ubiquitous, 24/7, mostly digital channel. Education services such as software and IT support have replaced textbooks as Pearson’s primary breadwinner, while acquisitions including Embanet-Compass, an online-learning services provider to North American colleges and universities, are expanding the company’s presence in that area.

Pearson’s ability to think laterally becomes especially clear in the way it creates a unified educational experience between offline services and online educational products. For example, Pearson provides tech-nology infrastructure, software and consulting services to K-12 schools in the United States. Among the technology offerings: information systems that allow schools to track student schedules and systems that help teachers create lessons.

Pearson also works with initiatives such as Udacity and MIT’s edX that offer “massive open online courses” (or MOOCs). If students want to receive accreditation for their MOOC, they can go to one of the more than 4,000 physical testing centers Pearson operates worldwide. The company has also developed mobile apps to connect teachers, students and parents on a common platform for sharing student information.

Pearson’s publishing arms have also been among the first movers shifting to digital. Penguin India was the first Indian publisher to launch an e-book program, while the Financial Times Group’s FTChinese MBA Gym App (a tool with tailored training courses and special articles from the Financial Times) has become one of the bestselling education apps on iTunes in China.


25

more than 30 percent in revenues each year. By the end of 2011, PayPal accounted for 38 percent of eBay’s total revenues.

In 2007, eBay expanded its portfo-lio of collaborative businesses by acquiring StubHub, the “fan-to-fan” event-ticket reseller. Like PayPal, StubHub’s growth soon began to outpace that of eBay’s auction site. Despite its later agreements with larger sports teams and venues, the composition of StubHub’s growth—65 percent of its tickets in 2011 still came from individual and part-time resellers—indicates the growing power of the collab-orative economy.

Agile organizations also learn quickly, and pass on what they learn. To meet the needs of increasingly conscientious consumers, companies have to equal—and even exceed—industry standards for environmental responsibility. Several Brazilian paper companies, including Klabin and Suzano Papel e Celulose, stand out for their efforts.

In particular, Suzano was the first pulp and paper business (and the first Latin American company of any kind) to quantify its carbon footprint globally. The company now ranks second worldwide in eucalyptus pulp production (eucalyptus, which is highly adaptable and fast-growing, is considered an ideal species for planted forests) and eighth largest worldwide for overall pulp production. The company assisted nearly 3,800 people through its Community Agricultural Project, in which residents received instruction on environmentally friendly methods of seed selection and farming. As a result of these efforts, 97 percent of its suppliers

in the Brazilian state of Maranhão were under contract a year before the operation even started.

The idea that consumers are changing is not new. What is different, however, is the way in which they are changing and the seemingly random directions consumer behavior can take. This diversity presents companies with a substantial problem, as they try to apply traditional business models—premised on size and scale—to a more complex and fragmented reality.

Retailers, for example, must meet the expectations of consumers accustomed to buying goods online at competitive prices and having them delivered quickly. And they must do so while creating offerings that are distinct enough to address individual preferences while still meeting expected standards of social and environ-mental responsibility.

For many, juggling these demands may seem like trying to square the circle, and business leaders might feel daunted by the challenge. The answer lies in responding to change with analytical skill, an adaptive mindset and an agile organization—successfully wedding the scale advantages of the large with the tailored approach of the small, the traditional benefits of the old and the cutting edge of the new.

By achieving the right balance between sets of extremes, businesses can turn consumer change to their advantage.

About the authors

Paul F. Nunes is the managing director of research for the Accenture Institute for High Performance. He is based in Boston. [email protected]

Samuel Yardley is a London-based strategy manager in Accenture Management Consulting. [email protected]

Mark Spelman leads Accenture’s global thought leadership program and the company’s strategic relationship with the World Economic Forum. He is based in [email protected]

The authors would like to thank Ivy Lee for her contribution this article.


A fresh start for enterprise ITBy Allan E. Alter, Paul R. Daugherty, Jeanne G. Harris and Frank B. Modruson





This transition is going to force senior executives to consider anew every aspect of enterprise IT—from strategy and mission to architecture, infrastructure, applications, security, organization, governance, skills and relationships with users.

And when they do, many will conclude that their enterprise IT needs a restart. And for good reason. Today, all businesses are becoming digital businesses; software and technology are now at the core of nearly every industry and function. This calls for a fundamental, strategic rethinking of IT that begins to create a future capability that is competitive and differentiating, even while operating at significantly lower cost. Lamented legacyStanding in the way of a successful transition, however, is the oft-lamented problem of legacy systems. For CIOs, they are a major obstacle to their ability to take full advantage of opportunities presented by the cloud and “as a service” capabilities.

They also demand a great deal of time, as IT organizations focus on building and maintaining customized capabilities, most of which go unused. An Accenture analysis of more than 30 SAP systems, for example, found that clients use only 23 percent of customized variations and, for that matter, only 70 percent of standard ERP capabilities.

Many business and IT executives recognize the extent of the problem. An Accenture Institute for High Performance survey found that if given the chance to rebuild one of their company’s departments from scratch, more executives would choose the IT department than any other. And, perhaps not surprisingly, IT executives said they would do so by an even larger margin than their business peers (see chart, opposite). In another Accenture survey, 45 percent of UK executives believe that eliminating legacy systems will provide IT the flexibility needed to meet future user and customer needs.

If only it were that simple. In practice, CIOs don’t have the luxury of executing the equivalent of a tear-down on a dilapidated house, destroying the old and rebuilding from the ground up. Instead, they have to significantly remodel while still living in the house. And since the digital world can be a dangerous place, they also have to protect the house.

While there’s no operating manual for a restart, there are some clear guidelines that can help executives through the process.

The mandate. For all the warnings about the need to change to enable digital business, few executives will buy into the need for a restart unless they’re convinced it will provide

Given that the latest technology news can occasionally flirt with hyperbole, a suggestion that something IT-related is “epoch-making” might well be greeted with a yawn. But it’s no exaggeration to describe the transition that enterprise IT is currently undergoing in exactly those terms.

29


tangible benefits in the short and medium terms. “You have to convince yourself that the business is going to be in a much better position,” notes Chris Perretta, CIO of financial services company State Street Corp. “You’re not going to transform the organization for a 10 percent improvement in performance.”

The catalyst for State Street’s own IT overhaul was a root cause analysis that identified flaws in the company’s business operations. It found that the ultimate cause of many problems was IT-related: the financial services company’s IT architecture, the way the company built systems and how it stored data. For example, it was unable to adequately track trades through each step in the trading lifecycle because there were multiple reconciliation systems, some reconciliation work was still being done manually and there was

no system of record. To maintain industry leadership and comply with regulations, the company’s IT platform had to advance.

Restarts can also set up IT to support new growth and profitability. One of the most obvious justifications for restarting IT is to support a corporate restart, such as spinning off part of a business as an independent company. That’s what happened when Accenture became a new public company in 2001.

A restart can also set the stage to accomplish a number of other goals.

Pursue a new growth strategy. When an old IT infrastructure and systems do not suit a change in strategic direction, it’s time to create new ones that can. BB&T, a North Carolina financial services

company, started its IT transfor-mation effort when it switched from a growth-through-acquisition strategy to one driven by organic growth, and found itself competing with other companies that differentiated themselves through IT. BB&T’s enterprise IT, designed to integrate new acquisitions and run back-office operations, was completely overhauled to focus on providing new services to clients, reducing the company’s cost of doing business and data security.

Enter existing markets and create new ones. Australia Post is a case in point: It needed to make up for postage revenue lost to email and impose order on a messy IT infrastructure. Brought in from Australia’s BlueScope Steel in 2006 to overhaul those old legacy systems, Australia Post’s

Information technology 35%

Operations (includes manufacturing, logistics and store management) 22

Human resources 19

Marketing and communications 10

Finance 9

Sales 5

IT executives: 40%

Other executives: 30%

Source: Accenture Institute for High Performance Future of Enterprise IT survey, August 2011

Time for a restart In our survey, both IT and business executives indicated that IT was the function they most wanted to rebuild.

“With no constraints, which part of your organization would you want to build from scratch?”



CIO at the time, Wayne Saunders, invested $500 million to modernize and rationalize Australia Post’s IT infrastructure and organization. That primed the country’s national postal service to grow its parcel, logistics, passport and payments businesses, and to launch an e-services and telecommunications business. By mid-2011, its Future

Ready program had enabled Australia Post to grow revenues faster than costs for the first time in four years and increase profits by 31 percent.

Change the business model. The music, publishing, retailing, video rental and travel reservation industries aren’t the only ones

The Accenture Institute for High Performance’s Futures of Enterprise IT study identified more than 60 economic, social, geopolitical, demographic and technological forces that could influence the future of enterprise IT. These technological and economic forces in particular are driving the need to fundamentally reconsider IT infrastructure, organization and governance.

• Platform shift to cloud computing and services. Software, process, infrastructure and platform services provide quick, scalable access to powerful, minimal-maintenance technologies any place high-speed Internet connections are available. Open architectures incorporating Web APIs (application programming interfaces) offer an easy way to publish or receive streams of data. Organizations will migrate to these technologies as the IT industry provides better, less costly and more flexible options to server-based systems.

• The rise of consumer technology. Every business is now a digital business. Consumers, employees and managers are using their own devices, social networks and other consumer IT services to work, shop and purchase. The gargantuan consumer clouds run by Google, Amazon and other companies are far more powerful than those private companies build for themselves.

• Changing user behaviors. Technologies like smartphones, social networks and broadband, along with mass access to information, are permeating and changing everyday living. Expectations for workplace computing, and the way they use IT and information, are being shaped by your employees’ IT experiences in their personal lives.

• Greater need for business agility and faster IT implemen-tation. Technology is accelerating change in virtually every industry. IT-enabled global competition, and competition from new companies with business models built around new technologies, requires companies to respond to threats fast, and quickly spot and seize opportunities. The murky business environment only intensifies the need for responsiveness.

• Changing IT consumption and delivery models. Smartphone apps, self-service app stores and software-as-a-service are providing an easier and faster-to-use model than traditional software purchasing and installation. IT-dependent business processes can be obtained as a service through the Internet, rather than operated as an internal process.

• Big data exceeding capabilities of SQL-based databases. More and more of the data analysts need to produce insights is unstructured and non-numeric. Relational database tools were never intended for, and are ill-equipped to deal with, today’s quantities of data and its lack of structure.

• Executives willing to make their own IT decisions. Today’s executives have grown up with IT, studied IT in business programs, make their own technology choices in their personal lives, and have their own visions for the CFO or CMO role. They will take on more IT responsibility, rather than shy away from it.

• Venture capital investment in consumer technology. R&D and venture capital is going into cloud and consumer technologies. Future IT innovation will be targeted at consumers first and then adapted for businesses instead of the other way around.

The key drivers


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that have been transformed by the Internet. Take money transfer services. In many countries, mobile phones are becoming a common tool for sending money—and this was a clear and present danger to Western Union’s traditional wire transfer service. As then-CIO John Dick told CIO.com in February 2012: “For us to continue our relevance in the world, we need to look at alternate ways of moving money between people.”

That look forced the company to reevaluate and overhaul its IT. Today, Western Union provides consumer bill-payment services for hundreds of US companies and an international B2B bill-payment service.

Improve the company’s cash position. While the upfront invest-ment in a restart can be very large, the savings can be much greater. By replacing old infrastructure and systems, large companies have saved hundreds of millions of dollars—enough to underwrite the investments needed to restart IT. Since going public in 2001, Accenture’s $1 billion investment in infrastructure and application improvements has led to $3.5 billion in savings, reduced IT spending as a percentage of revenue by 64 percent and brought down the number of applications in use from 2,100 to 495.

Accenture’s CIO organization achieved these reductions by consolidating, centralizing and standardizing IT operations. From 2001 through 2012, Accenture cut global applications by 59 percent and local applications by 83 percent. The company also lowered its IT costs by outsourcing application development, maintenance and infrastructure services.

Accenture is not unique. By virtualizing its data centers and replacing local homegrown systems with SAP and Oracle modules, Dell reduced the maintenance slice of the IT budget pie to 48 percent and saved $2 billion in IT expenses over five years. State Street projects between $575 million and $625 million in savings from its business operations and IT transformation program, which includes transfer-ring some business applications to a private cloud. It has saved $198 million as of December 30, 2012.

Support an overhaul of a company’s business processes. Ford Motor Co.’s One IT initiative supported the company’s One Ford program to make the carmaker a truly global organization with one set of global processes, systems and products. For example, Ford unified regional purchasing systems and databases into a single system that connects employees with suppliers worldwide.

Operational transformation also drove State Street’s IT overhaul. One goal, pushed by the company’s increasingly global customers and the stresses of the 2008 crash on the financial sector, was to put global solutions in place more quickly. “We needed to run faster,” says Perretta. “Speed is about reuse, working the right projects and being able to reuse people easily. Those three things are built into the new model.”

It’s clear, then, that companies can meet the demands of a “mandate” to restart IT, provided they go about it in the right way. How can CIOs minimize the risks and maximize the rewards of a restart? Building a solid architectural foundation for the enterprise and effective execu-

tion are important, but more is needed. Through our research, we discerned five keys to helping a restart succeed.

Improve governance to boost confidence in decision making and oversight

With good IT governance and oversight, the initial commitment to a big, bold project is less likely to wane when other priorities come along. Stakeholders have had their say. There is confidence the decision was correct. Oversight committees have the visibility they need to track progress, costs, security and value.

Accenture and State Street both focused on governance once the need for a restart emerged. After Accenture became a public company, it put its internal IT organization in charge of IT planning and management. But it also created an IT steering committee of Accenture’s most senior business operations leaders to confirm key decisions and ensure alignment. The new company set up its IT function to run much like a managed services business that provides infrastructure and application services at market-competitive prices and service levels.

Consider looking for models that already have earned the confidence of executives, as State Street has done. The com-pany’s transformation program followed the same successful governance model it uses to manage mergers and acquisitions. “We like the model because in M&A, you’re very clear, accountability is very clear, the results are very clear, the financial pro forma



is very clear and unambiguous,” says Perretta.

Master the financials of IT

IT does not have to be run as a profit center to be run like a business. What it does need is an IT executive team that knows what it’s getting for its investments, inside and out. What’s the company’s total IT spending, and how does it compare with other companies? What’s the market price for the products and services it uses? What does it cost to provide a PC, take care of a help desk ticket, provide email or ERP, and keep servers running? Can the total spending be broken down on a percentage-of-revenue basis, a spending-per-person basis?

Questions like these require a more detailed cost and data analysis than many IT organizations now perform. But when the CIO shows he or she really knows the numbers, other executives are more confident that IT spending is being managed well and that IT is being run at or below market prices.

And there’s another important benefit: An IT department that thoroughly understands its own costs can confidently provide users with a choice of service levels and a range of charge-back fees. That is more like the choices consumers make in their personal lives.

Bechtel Corp. CIO Geir Ramleth took another approach to financial insight: He benchmarked his company’s IT costs against Google, YouTube, Amazon.com and 15 other Internet-native companies.

Ramleth found Bechtel’s per-unit IT costs were far higher than those at the other companies: at least

50 times more per megabit for networking than YouTube and nearly 40 times more per gigabyte of storage than Amazon. Bechtel had one system administrator for 100 servers, compared with one for approximately 20,000 servers for Google.

That insight justified his move to an internal private cloud. Ramleth was able to cut Bechtel’s network costs by 98 percent, reduce the num-ber of data centers to three, increase capacity tenfold and reduce latency (the time it takes for data to get to where it’s supposed to go) by adopt-ing the best practices of these compa-nies. “You can be very small and still do what we did,” says Ramleth.

Systematically replace old systems in large, digestible chunks

Instead of converting just one enterprise application, one form of user support or one part of the network at a time, replace them with the new systems in the largest chunks the company can manage—even entire layers of technology at a time. For example, when Accenture moved to a new global SAP platform, it retired 450 finance, human resource and sales applications and replaced them with a single, integrated global version.

Many IT organizations prefer a seemingly safer and more manageable approach, replacing systems in small steps, a function or part of a function at a time. But when companies implement a new system in piecemeal fashion, they are operating at too small a scale to invest in the repeatable procedures and process automation required to replace systems quickly and consistently. The rollout is more error-prone and takes longer.

For further reading

“The Question CIOs Must Really Ask,” Fortune, October 2012: http://tech.fortune.cnn.com/2012/10/01/the-question-cios-must-really-ask/

“Forecasting the Future of Enterprise IT,” Baseline, July 2012: http://www.baselinemag.com/c/a/IT-Management/Forecasting-the-Future-of-Enterprise-IT-577698/

“Reimagining Enterprise IT for an Uncertain Future,” Accenture, February 2012: http://www.accenture.com/ us-en/Pages/insight-reimagining-enterprise-it-uncertain-future.aspx



33

Accenture experienced this when it first started to move to voice-over IP. The experiences of the first two or three offices that were moved to VoIP were painful because they were treated like one-time projects. The problems ceased when the program managers stepped back, came up with a standard procedure, and started implementing VoIP with the same step-by-step process in every office.

Incrementalism carries other risks. Companies are slow to gain the benefits from the conversion. They must live with (and pay for) both the new and old systems simultaneously. The dissatisfaction with a long, drawn-out migration can cause the project to be canceled, leaving the IT organization sup-porting an IT infrastructure that’s half-based on today’s technology and half-based on tomorrow’s.

Strengthen the IT competencies needed for the future

CIOs need to revisit their organiza-tions as well as their technologies. There’s much to take into account: the growth in consumer informa-tion technology, the increased availability and maturing of cloud and other business IT services, and all those technology-endowed customers and employees.

Today, says Phuong Tram, the CIO of DuPont, “you have to share in an infrastructure that people can access, regardless of where they are. Are you going to provide all that infrastructure for the millions of people you need to work with, or will you ride public infrastructure and consumerization?” At DuPont, Tram is restructuring his organization into five major

global competencies: governance and strategy; business-facing and process-supporting IT; IT operations, integration and partner management; continual improvement; and trans-formation management. He is also turning to outside services to provide and manage mature technologies and business processes. To demonstrate their value, he has made his own IT organization an early adopter of virtual desktops. “We have adopted this within our organization, and the lesson we learned is you cannot convince others if you don’t do it for yourself first,” says Tram.

Justify the expense of replacing systems on the overall benefits, not the benefits to one site, location or application

In a large organization, the business case for replacing systems will vary by office location. Networking costs in the United States are relatively low, for example, while those costs in South Africa are high, and the busi-ness case there may not be as strong. CIOs that separate out the business case by location will receive funding for the locations with the highest ROI, but they may lose funding after the high-ROI parts are completed.

When Accenture replaced its telephone systems, the IT executives made a business case for doing the transformation at all of the company’s 300-plus locations. The IT management team did not prioritize the locations with the best business cases, then go back and try to justify converting the locations with the worst ones. In essence, the locations with the worst business cases rode the coattails of the good locations. Accenture elimi-nated its old telephone systems everywhere—reducing costs while

bringing IT to a new, higher standard of performance.

Executives have a choice. They can delay making needed changes, putting their operations at risk of obsolescence and even irrelevance. Or they can stick with their analysis and seize this opportunity to rethink and restart IT. The good news is that between the strengths of these new technologies and services, the enormous savings they can provide, and the strong desire for real change, there never has been a better time to restart your IT.

After all, information technology has become universal, cheap, powerful and simpler to use. Shouldn’t it be managed differently from when it was limited, expensive, less capable and more complicated?

About the authors

Allan E. Alter is a research fellow at the Accenture Institute for High Performance in Boston, where he specializes in IT strategy and management. [email protected] Paul R. Daugherty is Accenture’s chief technology officer and serves as the senior managing director of the com-pany’s Technology Strategy & Innovation group. He is based in New [email protected] Jeanne G. Harris is the managing director of information technology research at the Accenture Institute for High Performance in [email protected] Frank B. Modruson is the chief information officer of Accenture. He is based in [email protected]

The human touch behind Asia Inc.’s global pushBy Arika M. Allen, Paul Gosling, Grant D. Powell and Claire Yang

A new generation of Asian companies is going global and actively managing talent, leadership, empowerment and communications to overcome obstacles and drive growth. These culturally savvy leaders are rendering stereotypes obsolete, setting the standard for other Asian globalizers and posing a new threat for established multinationals.

Asia


Asia


This particular multinational is Takeda Pharmaceutical Co., one of Japan’s oldest and largest drug companies. It is also a forerunner of a new generation of Asian com-panies that are rapidly expanding outside the region.

In 2008, Takeda purchased US-based Millennium Pharmaceuticals for $8.8 billion, followed three years later by a $13.7 billion ac-quisition of Swiss giant Nycomed. More recently, Takeda built a new plant in Russia and acquired Mul-tilab, a pharmaceuticals company in Brazil.

But this is not about a buying spree. Accompanying Takeda’s expansion has been a drive to hire non-Japanese staff and management with inter-national experience, and a decision to use English across its global operations. The company’s leaders are changing the organization’s culture with an emphasis on diversity and “borderless” teams. In the process, they are making Takeda a leader among the many Asian companies working to master the human factors in their push to go global—considerations that many of their predecessors ignored or did not fully understand.

An emphasis on the people side of the equation—also very much

in evidence at companies such as Samsung and Tata Motors, among others—is seen as essential to the long-term global success of those organizations. It enables them to better compete for the talent that can fuel innovation, quality and high performance—key elements of a differentiated competitive thrust identified in new research commis-sioned by Accenture and produced by the Economist Intelligence Unit. By fostering devolved leadership, these Asian companies can stay much closer and be far more re-sponsive to, their overseas markets.

This trend also poses big questions for Western multinationals. As their Asian rivals focus on the human side of their internationalization efforts, they’ll become more attractive places to work and may well lure top talent from today’s leading global companies. So busi-ness leaders worldwide need to ask themselves whether they are properly matching their Asian rivals’ efforts.

Up-and-comersThey also need to be alert to the momentum of the numerous Asian companies that are eager to learn from and emulate the Samsungs and Takedas, the up-and-comers that, before long, could become forceful competitors or promising partners—or both.

Meet today’s Asian multinational: Its top leadership includes an American, a German and a South African. Business is conducted in English. It is active in 70 or so countries, where its offices are run largely by non-home-country executives. The company is pushing aggressively into Russia and Brazil, and its goal is to increase sales from overseas operations to more than 65 percent of revenues.

37


Although Asian corporations now comprise 35 percent of the world’s biggest enterprises, they make up just 1 in 10 of the most valuable brands.

Japanese companies began their global march decades ago, and South Korean giants such as Hyundai and LG Electronics have followed. But in the last decade, many more of Asia’s companies are making their presence felt worldwide. Companies such as China Mobile Communications Corp., Huawei Technologies Co., Kia Motors Corp., State Bank of India and Wilmar International. have all joined the ranks of the Fortune Global 500.

The fast-paced and assertive overseas expansion of these Asian globalizers is gaining attention—not only because of the scale of their investments but also the rate at which those investments are rising. In 2011, Asian enterprises invested $383 billion outside their home markets—more than twice the $158 billion they invested a decade ago.

More and more of those funds are being invested far beyond the region. Ten years ago, Asian businesses made nearly 60 percent of their investment within Asia itself. In 2011, that ratio reversed, with more than 60 percent of their capital earmarked for outside the region. Japanese companies make up the largest block of investors overall, though their rivals from China are not far behind.

Cultural stumblesHowever, there has been no auto-matic correlation between money invested and results achieved. As Asian companies expand into new territory, they run up against very different behaviors and belief systems. For every successful overseas move by a Samsung, there have been many, many retrenchments and losses by Asian companies as they have stumbled

over local cultural norms and language difficulties while clinging to rigid and often hierarchical practices that worked well for them at home.

Perhaps the most notorious example of cultural mismatch was the attempt by a Japanese company to teach some of the female employees of a newly acquired US company how to serve tea, wear their hair and choose their wardrobes. Although fewer Asian companies today are likely to make such a faux pas, their approaches are nonetheless often out of sync with what works in the regions where they choose to invest.

Their business leaders know it. Asked to assess their internal execution in light of their global plans, Asian executives as a whole say their greatest internal challenges are dealing with cross-cultural issues, mastering the human aspects related to talent and having the right local leadership. Nearly half confess that they struggle with cross-cultural barriers, and more than half are hard-pressed to attract and retain talent in overseas markets, according to the Accenture/EIU study (see charts, pages 39 and 41).

These deficiencies are proving to have consequences for many companies. One sure indicator: Only about a third of companies from China and India say they have seen their revenue and profits from international operations develop in line with their expectations. The figure is even lower among Japanese companies, at just 12 percent.

Another telltale sign: Many Asian companies have found it tough to create internationally recognized brands. Although

Asia


More and more Asian companies are reducing their reliance on low-cost operations and striving for competitive advantage based on innovation, employee skills and intellectual property.

Asian corporations now comprise 35 percent of the world’s biggest enterprises, they make up just 1 in 10 of the most valuable brands, according to Interbrand’s 2012 list of the world’s 100 Best Global Brands—a gain of only three companies over the preceding decade.

With these markers to go by, is it any wonder that there is such keen interest in what the successful Asian globalizers are doing?

For most would-be Asian globalizers, the biggest challenges lie ahead. They confront a far more complex and volatile global landscape than did the first wave of Asian companies that built global businesses. They must go nose-to-nose with strong local companies and an increasing number of multinationals.

Foreign affairs The game gets bigger and tougher every year. Between 1990 and 2010, the number of companies operating across borders almost tripled, from 35,000 to almost 104,000, with the proportion of those from emerging markets soaring from 12 percent to 30 percent.

The prevalence of family-owned businesses and state-owned enterprises in Asia also presents unique challenges. In companies where a family still holds a sig-nificant stake—half of publicly listed companies across 10 key markets in Asia—ownership and management are often tightly intertwined, which makes it harder for them to attract and groom outside talent. And it’s tough to create compelling career paths and build diverse leadership teams in state-owned enterprises, where top leadership roles can be politically determined.

At the same time, many companies from China, India, Indonesia and other Asian nations are discovering that as they step beyond their national boundaries, their traditional cost advantages shrink. That’s why more and more of them are reducing their reliance on low-cost operations and striving for competi-tive advantage based on innovation, employee skills and intellectual property (see chart, page 41).

But that shift demands much more cross-cultural savvy, borderless thinking and openness to new ways of working and managing. Simply put, the global push requires these companies to navigate in business realms that are foreign—figuratively as well as literally.

Obstacles notwithstanding, fully 90 percent of Asian companies remain committed to global growth, according to our research. More than 35 percent are bullish: They say they are planning aggressive growth overseas.

What are their chances of success? That depends on how effectively they can bridge the capability gaps identified by the research: having a clear purpose and strategy for growth; finding points of differentiation in crowded inter-national markets; building robust and scalable operations; and putting in place the people factors necessary for sustained growth.

Here we focus on the human side of going global because it is proving critical for successful Asian globalizers—those companies that have thrived in their past interna-tional expansion and are confident in their abilities to execute as they continue down that path. Their



39

Western Europe

$13

$58

Eastern Europe/Russia

$7$17

Asia

$140$91

Middle East/Africa

$17$49

Australasia

$9$23

$12

$51

North America

$9

$45

Latin AmericaInvestment within Asia

2003 2011

Investment outside of Asia

2003 2011

A decade of massive international growth by Asian companies For the past 10 years, Asian companies have invested more than $2.9 trillion in regional and global expansion.

$ billions


In 2011, 43% of all Asian investments were via merger and acquisition deals.

However, 90% of Asian companies are committed to continuing their overseas expansion.

Just 28% of Asian companies met international revenue and profit expectations over the past three years.

In 2011, 63% of all Asian outbound investment was outside the Asian region.

Source: Accenture analysis based on data from Thomson Reuters and fDi Markets, a service from The Financial Times Limited 2013. All rights reserved.

Asia


competitive edge is apparent in the Accenture study’s findings. It shows that compared with typical Asian companies, these Asian leaders have a sharper focus on economic outcomes and invest more in developing executives with global mindsets. They’re better at recog-nizing the need to address cultural issues, and they typically grant more autonomy to their overseas operations than do other Asian globalizers.

The characteristics that best differen-tiate the successful Asian globalizers from their regional counterparts can be distilled into three human factors: They are good at securing and retaining talent in overseas markets; they work hard to build global mindsets among their business leaders and teams; and they gen-erally do a good job of managing cross-cultural interactions.

Each merits a closer look.

Hybrid approaches to talent management

Knowing that they cannot rely on home-country workers to drive overseas performance, successful Asian globalizers are investing more in initiatives to attract and develop talent. Some are also adopting hybrid talent management approaches that combine home-country methods and global practices.

Take Samsung. To promote agility and accelerate its global growth, the South Korean electronics and consumer-goods giant has developed a business system that blends global best practices with an essentially Japanese business system.

In particular, when Samsung recruits, it no longer appoints managers primarily from an internal HR line; instead, it looks for talent outside Korea, for all management levels. These inter-national hires spend two years in Korea before managing overseas operations, often in their own home countries. As Takeda has done in Japan, Samsung has hired outsiders to fill key senior management roles in South Korea—an unusual move in a culture that has been relatively insular.

To promote ownership of and accountability for the new talent strategy, Samsung’s chairman, Lee Kun-Hee, has established metrics around attracting and retaining talent across the organization. While this transi-tion has taken time to develop, Samsung has benefited from fresh perspectives and is now better equipped to manage its global operations.

In China, consumer-electronics manufacturer TCL Corp. relies heavily on its Eagle Talent Training Scheme to help ensure that it has one of the lowest employee turnover rates in its industry. Each TCL employee takes one or two training courses a year. The curriculum designed for top management—one of four categories of training—helps trainees develop international operation capabilities, strategic thinking, leadership, and industry and business group management skills.

And in India, ICICI Bank has assigned 600 employees to scout for potential leadership talent




41


61% of Asian executives say their top external challenge is to understand their overseas

markets, customers and their preferences.

53% of Asian businesses struggle with government regulations as well as local policies and

procedures in overseas markets.

2. How will we serve customers and navigate overseas markets?

4. How will we build talent, bridge culture gaps and develop global leaders?

41% provide cultural sensitivity training.

46% struggle with cross-cultural

barriers.

51% struggle to attract and retain talent in

overseas markets.

47% provide mentoring and coaching programs

focused on global leadership.

3. How will we execute our strategy?

31% say they have the right operational capabilities to support

international operations.

29% have the right processes in place to ensure effective operations across

multiple geographic locations.

1 2 3

1

6

45

73 2

27% have appropriate IT infrastructure to support operations across multiple geographic locations.

Most Asian companies are shifting their strategy over the next three years from low-cost competition.

Success in highly competitive global markets will depend on providing differentiated products and services.

Our intellectualproperty

Strength of brand equity

Skills of our people

High-valueinnovation

Low-costinnovation

Low-costoperations

Logo

Growing pains To be successful internationally, Asian companies must ask themselves the following questions.

1. How will we compete?

Asia


within the company. Each year, these internal recruiters send 5,000 candidates’ names to a review panel, which assigns a grade to each name. Those graded “A” or “B” go through a four-day training program that includes structured exercises, guest speakers (including ICICI’s chief executive) and screening inspirational films such as 12 Angry Men. These future leaders are also granted company stock options.

However, the research suggests that initiatives like Samsung’s and TCL’s are exceptions, and it underscores that many Asian companies need to do more to attract and retain talent in inter-national markets. Only about half

of the companies we surveyed are undertaking initiatives to attract foreign talent. Challenges like these are of real significance for other businesses that might be considering joint ventures or other forms of partnership with these Asian contenders.

Steering away from culture clash

Successful Asian globalizers make special efforts to improve communication and build shared values across their far-flung operations.

Like Takeda, Fast Retailing Co. in Japan is gradually adopting English as its global language. That said, the company, which owns the popular UNIQLO brand

Strength of brand equity

Skills of people

High-value innovation

High-quality products/services

Low-costoperations

Low-costinnovation

Intellectual property

(patents, trademarks)

In three years

Today


54%

20%

45

29

18

3732

4439

4741

47

55 55

Changing competitive advantage Asian companies expect that within three years, the drivers of their competitive advantage in international markets will have changed significantly.

Percentage of all respondents; each respondent chose top three



43

of fashion apparel, is not forsaking its home-country values; it sees itself as “born and bred in Japan” and aims to preserve its Japanese core values by using a variety of approaches for continually educating its employees around the world.

Some years ago, the company tried to expand overseas, but the utilitarian Japanese brand received a lukewarm reception. So Fast Retailing went back to the drawing board. It crafted a global image that preserves what its founder calls its “Japan-ness” while conveying a sense of global connection—with, for example, store layouts and decor aimed at style-conscious shoppers in Manhattan and London, a free fashion maga-zine for the New York stores written to appeal to the urban shoppers’ cultural interests, tie-ins with local celebrities and artists, and more. One element of this successful approach: The company’s integrated advertising and marketing campaigns encourage consumers to interact with the brand in digital environments. The successful globalizers are just as deliberate when it comes to mergers and acquisitions. When India’s Tata Motors bought Daewoo Commercial Vehicle Co.’s truck manufacturing operations, it took great care to integrate the South Korean company’s business culture with its own.

To address Daewoo’s misgivings— the company’s owners were looking to sell the truck division to a European or American company—Tata launched an information campaign, ensuring that all the relevant literature describing Tata and its practices and philosophies was translated into Korean. Then the Tata teams explained their company’s culture and ethos, along with its employment

policies, to Daewoo’s senior man-agement to try to persuade them to accept their bid.

Tata’s overtures were successful, and Daewoo became the Indian company’s first cross-border acquisition.

But Tata knew that the deal would not be successful if they failed to properly integrate Daewoo’s operations, and that meant they had to win over Daewoo’s employees as well. So the Indians began reaching out to the workforce.

They kept the former Daewoo management team intact. The first few months of Tata’s ownership were spent observing and learning—in both directions. Some members of the Indian team studied Korean; some Koreans began to learn English. The Indian team gained an understanding of Korean sensibilities and ways, and the Koreans, in turn, got to know and appreciate the Tata group’s philosophy.

Fortis Healthcare is making similar efforts to create a common “language” that reflects its corporate culture. The Indian healthcare company, which operates across nine countries in the Asia-Pacific region, is striving to develop unique, unified ways of working across locations. “Language plays a part,” says executive director Balinder Singh Dhillon. “Not the spoken language, but the common-ality of terms and understanding and values. This includes the softer side of things, such as how you address a patient.” Many Asian companies have not yet mastered these kinds of issues. More than 40 percent admit to difficulties in establishing shared

At the heart of strong leadership is a global mindset— evident in how some Asian globalizers actively encourage firsthand exposure to foreign markets.

Asia


corporate and community values. Nearly as many say they struggle to instill respect for different cultures and backgrounds.

Taking “global mindset” from premise to practice

Successful internationalization strategies require strong leadership, from headquarters down to local operations. At the heart of strong leadership is a global mindset—evident in how some successful Asian globalizers actively encourage firsthand exposure to foreign markets.

For instance, Sunny Verghese, chief executive of Olam International, the Singapore-based supplier of

agricultural products and food ingredients, sees it as a rite of passage for executives to spend time in difficult locations across the global agribusiness group’s operations. He describes this as “managing the risks firsthand, not learning about them in a classroom.”

Others make it a priority to give local leadership real decision-making authority. Korean conglomerate LG Electronics, for example, has built strong market share in India by focusing on developing local leadership. The company has empowered native employees by transferring authority and respon-sibility to them. Expatriate Korean managers have also served as mentors to help local management teams build their skills.

For further reading

“The last 10 miles,” Outlook 2012, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-last-10-miles-china.aspx

“Catching the ASEAN wave,” Outlook 2012, No. 1: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-catching-asean-wave.aspx


If they hope to catch up to Asia’s top globalizers, other organizations will have to ensure that they align their global talent strategy with their global growth strategy. The leading globalizers already excel at this. Questions like these will help other companies follow in their footsteps.

Talent• How can we enhance our employee value proposition so we

can source the best skills and talent locally and globally?

• What kinds of compelling career paths can we offer to differentiate ourselves in the battle for local and global talent?

• What training and development programs can we create to increase the quality of our talent worldwide?

• How can we best deploy our talent in local markets to strengthen our competitive positioning?

Culture• What shared cultural attributes must we develop in

our people?

• How can we create common ways of communicating across the organization, regardless of where we’re operating?

• What can we do to identify and bridge culture gaps, and to build common values across our diverse markets?

Leadership• What are the leadership characteristics we need if we’re to

deliver on our international growth strategy? How can we develop those characteristics?

• How can we have our top leaders adopt diverse ways of thinking? How do we help them develop and sustain a global mindset?

• How do we support and empower local leaders so they can properly sense and respond to local business dynamics?

• How can we foster “borderless leadership”— enabling leadership authority everywhere it’s needed across the globe?

How to catch up to Asia’s globalizers


45

Some successful Asian globalizers contend that it is not enough to grant more authority to trusted local leaders; it is also important to maintain as flat a corporate structure as possible to speed decision making and improve agility.

For example, at HTC, the Taiwanese mobile communications manufac-turer, information f lows quickly between the company’s top executives and its empowered regional chiefs. Phil Roberson, former regional director in the United Kingdom and Ireland, had direct contact with HTC’s chief financial officer, and outside of Taiwan, the most junior person is typically only five layers away from the chief executive.

Our study’s findings reveal just how rare such approaches are. Only 47 percent of the Asian companies surveyed use mentoring and coaching to develop their leaders. Less than 20 percent use international assignments to build a global mindset in their leaders. The study also discovered that many offshore offices lack respect for the authority of managers at headquarters—and that the latter are often unaware of how they’re regarded in the field.

If these remain the norms for many Asian companies, it will make it that much easier for potential global partners to screen them out in favor of those that are emulating the Takedas and Tata Motors.

Individually, few of the practices described here are breaking new ground; most are entirely familiar to executives at global multina-tionals. Collectively, however, they represent something much more meaningful: a surge in global

competitiveness among Asian companies, barely visible today, that will gather momentum as more and more companies—from South Korea to Vietnam, from India to Indonesia—actively eye best practices, with special scrutiny of what today’s most successful Asian globalizers have done.

So what will all of this mean for the makeup of the global economy in 20 years? Not even the most prescient economists can say. But Asian companies are clearly on the move. And business leaders everywhere, as a matter of urgency, need to track the speed with which these “people practices” proliferate among companies they may not yet have heard of. Many of those companies are busily taking notes on how the Olams and Samsungs are doing things. For they are the competitors—and quite possibly the partners— of tomorrow.

About the authors

Arika M. Allen is a Singapore-based senior manager in Accenture Strategy. [email protected]

Paul Gosling is the senior managing director for Accenture Management Consulting in the Asia-Pacific region. He is based in Singapore. [email protected]

Grant D. Powell is the managing director of the Accenture Innovation Center in Singapore. [email protected]

Claire Yang is a managing director and the lead for the Accenture Talent & Organization group in Greater China. She is based in [email protected]

Innovation


Big Bang Disruption

The innovator’s disasterBy Paul F. Nunes and Larry Downes

As business costs are driven ever lower, some companies are creating disruptive products that are simultaneously better and cheaper than existing products, right out of the gate. The upshot? Success for those who play by the new rules of strategy and competition—and disaster for incumbents who can’t adapt fast enough.

Innovation


The most recent round of improvements in information technologies has changed the game once again, driving down costs and prices over time. The challenge now for innovators is to invent products so beloved by customers that they will pay more for them despite falling prices. Given the time it takes to innovate, that can be a tall order. As a result, markets are being rocked by a new kind of offering—one that renders the traditional priceperformance tradeoff irrelevant. New products and services that exploit today’s power of IT now enter mainstream markets not only better but also cheaper. In today’s fully connected, alwayson world, these new offerings are also better inte grated with the way customers live and work (in strategy terms, they provide greater “customer intimacy”). And word of their superiority in all relevant dimensions now travels the globe in a flash, like the latest YouTube sensation.

The result: Entire product lines and whole markets are now being created or destroyed overnight. Say hello to “bigbang disrupters.” Once launched, these disrupters are hard to fight. They don’t just create dilemmas for innovators. They trigger disasters.

Innovation on its headConsider the smartphone, which has displaced a growing list of former standalone products, including digital cameras, calculators, organizers, alarm clocks, email readers and, perhaps soon, handheld game devices, electronic book readers, video cameras and laptop computers.

When Google launched its free (perpetually) beta app Google Maps Navigation, the company was, as always, looking simply to drive more eyeballs to more advertisements by integrating more alreadydigital information. But from the outset, the app outperformed expensive, standalone GPS devices on every strategic dimension. It’s cheaper (that is, free); it’s constantly being updated and enhanced in real time; and it offers a more customerintimate solution by connecting with other smartphone apps, including search results, maps, mail and contacts.

Little surprise, then, that the major players in the GPS device market lost as much as 85 percent of their market cap in the 18 months after the Google Maps Navigation introduction. Bang!

Industries at riskThe reality of bigbang disruption is increasingly obvious to anyone haunting the coffee shops and venture capital conference rooms in innovation hubs from Silicon Valley to Singapore. What is simply cool for these young entrepreneurs can be devastating for incumbents in industries that don’t, and perhaps can’t, see bigbang disruptions coming until it’s too late.

The bitter lesson learned: Today’s innovations come out of left field, combining technologies seemingly unrelated to a company’s offerings, to achieve a dramatically better value proposition.

Bigbang disrupters may not even see the incumbents as competition. Disrupters don’t share the incumbents’ approach to solving customer

Nearly everything you think you know about strategy and innovation is wrong.

49


Regulated industries are especially vulnerable to information-driven big-bang disrupters.

needs, and they’re not interested in offering a slightly better price or performance with hopes of gaining a shortterm advantage. Usually, they’re just tossing something shiny at consumers, hoping to attract them to a completely different business.

While this new style of devastation is starting to be recognized in such informationintensive industries as consumer electronics, software and retailing, every industry is at risk. That’s because information is increasingly the last remaining source of competitive advantage in a wide range of industries, including automobiles, financial services, education, food and other commodity goods.

Disruption is now attacking even hardasset businesses. Consider the impact of new smartphonebased applications such as Lyft, SideCar and Uber on mature taxi and limousine services. These new businesses allow customers to order and pay for rides with a mobile device, track dispatched rides using location services and rate the driver after each trip.

Nothing about the new services is proprietary or particularly hard to duplicate. But the common response of incumbents so far has been to focus their efforts on convincing regulators to ban the new entrants rather than figure out how to compete with them. That response is both predictable and stereotypical. It is also counterproductive. Customers have been quickly galvanized through social media to fight back—so far, successfully.

Regulated industries are especially vulnerable to informationdriven bigbang disrupters. When the law implicitly or explicitly limits internal competition and bars new

entrants, businesses have little, if any, incentive to innovate. Taxi service is just one example. Countless other industry sectors have also fallen far behind the digital revolution. And once the disrupter finds a way in, the collapse is that much more sudden.

In Accenture’s ongoing study of the phenomenon, we have already identified bigbang disruption in more than 30 industry segments that cross all economic sectors.

LawbreakersA generation of executives has been schooled in the iron law that says companies must pursue one “strategic discipline” at a time—they can aim to be the lowcost producer, the innovation leader or the most customerintimate, but not all three at once. Bigbang disrupters, who are often entrepreneurs with little training and even less business experience to unlearn, present a stark contrast. They are, to coin a phrase, thoroughly undisciplined.

For decades, strategists were taught to focus with religious intensity on only one dimension of strategy, or they risked, as strategy guru Michael Porter famously said, getting “stuck in the middle.”

Today, innovators are no longer bound by this orthodoxy. Thanks to advances in IT and development platforms, the costs of innovation have declined dramatically. Innovators can now experiment, cheaply and rapidly, directly in the market using offtheshelf component technologies. And because each of those components will soon be cheaper, they can keep their perunit innovation costs lower than the predictable decline in production and delivery costs. Voilà: better and cheaper.

Innovation


Consumers have become accustomed to astonishing products, and are always poised for the next better-on-all- dimensions innovation.

Couple inthemarket development with modular and platformbased interconnectivity, and you have an offering that is almost certain to be highly customerintimate as well.

Likewise, followers of innovation pioneer Clayton Christensen have been trained to look for disruptive technologies in the form of lowerquality substitutes that enter mainstream markets first by picking off a company’s worst customers and then, as technology improves, by moving up to become competitive.

Under Christensen’s approach, executives who saw the early signs of disruption had time to respond. They could avoid what Christensen called “the innovator’s dilemma” by starting internal skunkworks projects to test the disrupter and get ready to shift when price and performance made the product acceptable to mainstream customers.

But now that technology platforms make mass distribution instantaneous and empower consumers to benefit from nearperfect market information from the most trusted source of all—one another—the pace of the solutions recommended by Christensen proves catastrophic.

Winners take allConsider as well the impact on marketing. Following the longvenerated innovation dissemination model of sociologist and theorist Everett Rogers, Geoffrey Moore wrote in the 1990s that successful newproduct introductions followed five discrete stages, moving from early adopters to mainstream users, but only after crossing a marketing “chasm” in which the sell message changes from the new and exciting to the familiar and incremental.

Bigbang disrupters, however, enter the market in only two stages—first to trial users (who are often de facto codevelopers and cofunders) and then to everyone else. Because they need not weigh the strategic tradeoffs of an incumbent’s new offering, bigbang disruptions can be marketed to every segment simultaneously, right from the start. When the iPad arrived, it wasn’t just for people who couldn’t afford a laptop. Every millionaire wanted one too.

Winnertakeall markets are often the result where even the secondplace business in the sector fails to see high profit margins. Take the example of Sharp Corp., the oncedominant maker of LCD panels. The electronics company saw a severe decline in its share price in 2012, due in part to its underperforming television business, despite the fact that its products compare favorably with those of the manufacturer that consumers rate highest on most online evaluation sites.

But the path is not always smooth for successful bigbang disrupters, and they often leave the market as rapidly as they entered it. Instead of a gradual decline as markets mature, the crash comes quickly. Consumers have become accustomed to astonishing products, and are always poised for the next betteronalldimensions innovation. As industries fade into the sunset, a lone incumbent, serving a market for nostalgic customers, may yet find a profitable niche. Still, such a market is rarely little more than a shadow of the original.

More bucks for your bangTo survive—and even thrive—amid bigbang disruption, companies must learn the new rules of strategy and competition. The key


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is to understand the new lifecycle of innovation, which loosely follows the metaphor of the bigbang theory of the universe. The new cycle consists of four parts: the slow drawing together of matter and energy (the Singularity), the explosion and expansion (the Big Bang), the collapse of what’s known (the Big Crunch) and the calm before the next storm (Entropy).

The Singularity: Find a truth teller

To combat the failure of traditional competitive intelligence, senior executives must find their “truth tellers.”

Bigbang disruption happens in large part because experimentation with a wide range of new, often

offtheshelf component technologies has become both lowcost and lowrisk. Many, many failures are likely before the right combination is found and proven to be costeffective. Often, the winning innovation is simply the one that combines the right technologies at the right time with a new way of doing business. Think, for example, of Amazon.com’s success with the Kindle, which came only after years of failed ereader products that had both the wrong hardware and the wrong business model.

For incumbents, the failed early experiments send false signals, lulling executives into the misguided belief that the disrupters are not ready for prime time. Rather, direct market tests are often, perhaps unconsciously, like artillery barrages. They are

Conventional wisdom Big-bang wisdom

Focus on only one strategic “discipline” or “generic strategy”— low cost, production innovation or customer intimacy.

Strategic discipline

Compete in all three disciplines at once.

First target a small group of early adopters and later enter the mainstream market.

New-product marketing

Market to all segments of users immediately. Be ready to scale up— and exit—swiftly.

Seek innovation in lower-cost, feature-poor technologies that meet the needs of underserved customer segments.

Innovation method

Seek innovation through rapid-fire, low-cost experimentation on popular platforms.


The end of conventional wisdom The fallout from big-bang disruption includes radically new ways of thinking about strategy, marketing and innovation.

Innovation


“walking their fire” onto the real target, step by step, homing in on the right combination of technologies and business model that will, once launched, suddenly disrupt mature markets and dismantle longstable supply chains. It is then that they level their full barrage.

Enter the truth tellers. These are industry experts with profound insights into new technologies and customer behaviors, who can predict earlier than anyone else when small tremors signal imminent earthquakes. Often, they are people who spend their careers working in the industry, and share a unique

passion for its mission, its products and its customers.

One example is the North American executive of a Japanese carmaker who drove the company’s decision to launch a new brand of luxury vehicles, based on his insight into fundamental shifts in income and spending in the US market. His truth telling played an essential role in the carmaker’s ongoing operations at the time.

Truth tellers—named for the characters on soap operas who move the plot forward by revealing big secrets—are often eccentric and

Innovators(2.5%)

Early adopters(13.5%)

Early majority(34%)

Late majority(34%)

Laggards(16%)

Trial users

Vast majority

Rogers’ market segments

Big-bang market segments

Rapid take-up Big-bang disruptions don’t follow the usual pattern of customer adoption famously described by management guru Everett Rogers. According to his model (shown in brown), new products sequentially gain popularity with five market segments. The big-bang model (shown in red) is taller and much more compressed: New products are perfected with a few trial users and then embraced quickly by the vast majority of the market.

Traditional technology adoption versus big-bang disruption



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The success of big-bang disrupters is driven by easy access to opinion, facts and comparison data, which creates something ever closer to consensus.

difficult to manage. They speak a strange language, one that isn’t focused on incremental change and the next quarter’s results. As a result, they may be found outside your organization—they may even be customers. Learning to find them is hard. Learning to listen to them is even harder.

The Big Bang: Exploit near-perfect market information

Bigbang disruption, once created, enters the mass market at ultrahigh speed. Instead of a slow, predictable process involving several discrete, sequential market segments—like the fivestage technology adoption curve model made famous by Everett Rogers—bigbang disrupters need worry only about two main categories of users: what we call trial users, and everybody else. In this stage, the goal is selling to everyone else—and fast.

The sudden success of bigbang disrupters is driven by easy access to market opinion, facts and comparison data, which creates something ever closer to consensus market opinion. The same platform that developers use to create and deliver their disruptions is now also used by consumers to communicate with one another to determine their shared judgment.

With ubiquitous and mobile networks, retailing all manner of goods and services has entered a new world. Rather than sellers broadcasting select information to potential customers, consumers now pull information from other consumers on price, quality and customer service, whenever and wherever they are. Advertising is both customized and timely,

and often comes in the form of trusted referrals.

That means when the right combination of component technologies and business innovations comes together, everyone knows about it instantly. Takeoff is immediate, and vertical. The model of the innovator’s dilemma no longer applies; now, for incumbents, it’s the line of sudden death (see chart, opposite).

The availability of nearperfect market information also means consumers make fewer mistakes. They don’t buy a mediocre product simply because manufacturers invest in more advertising. They wait until the right version— smartphones, 3D televisions, electric cars, solar power—emerges. Almostthere versions don’t sell poorly—they don’t sell at all.

Maintaining an intimate connection to trial users—the codevelopers and, thanks to crowdsourcing services such as Kickstarter, cofunders—is therefore critical. The new development model creates early users with a vested interest in new products, building intense loyalty to the concept, if not to a particular implementation.

Take, for example, the “smarthome” initiative of consumer electronics company Belkin International. Known as WeMo, the smartphone and tablet application has been designed to enable users to create specific commands for on/off switches of basic home functions and electronics, like lights. The company solicits and publishes user ideas for commands on its website, and when commands become popular enough—such as “If the Weather Channel says the sun has set, then have WeMo switch on

Innovation


the lights”—Belkin integrates them into the app’s default list of commands for all WeMo users.

The Big Crunch: Collar your risk

Not everyone is swept away by the onslaught of a bigbang disrupter. Some companies do survive, in many cases emerging in the new version of the industry in a position of greater leverage and profitability. But how?

The first step requires toughminded management, sufficiently steeped in bigbang strategy, that can quickly overcome the emotional response to traumatic change and take decisive action. Assets must be shed, products must be retired, business models allowed to sunset. Only then can incumbents unlock the hidden value of core, often intangible, assets.

Incumbents are trapped by their balance sheets. Traditional accounting still leads management to concentrate on the value of hard assets rather than expertise, brands, patents and human resources. But in a fight against bigbang disruption, intangibles are often the most valuable assets incumbents have—perhaps the only ones that don’t quickly become liabilities. Knowing what they are and understanding their true worth can make all the difference.

A bigbang disruption sets off a rapid decline in the value of physical assets. To compete with undisciplined competitors, incumbents must prepare for the immediate evacuation of current markets and be ready to liquidate oncestrategic assets. It’s important not only to shed mature technologies that will rapidly become

obsolete but to do so before they become worthless.

In the semiconductor industry, for example, fabricators are now hedging investments in new capacity by contracting to sell plants at a future time and price, often before those plants are even built.

Return on residual assets can be timesensitive, to say the least. Even for the innovators—or perhaps especially for them—collaring risk early on is essential to surviving the shift to the next bigbang disruption.

A new kind of diversification can also provide a valuable hedge against disruption. As industry change becomes less cyclical and more volatile, having a diverse set of businesses is vital. Industry leaders may have a hard time committing themselves fully to transformation, creating an opening for perennial secondbanana incumbents to shed their assets first and take their expertise, brand and intellectual property into other industries where change is happening at a slower pace. When the filmbased photo industry collapsed, it was Kodak, not Fujifilm Corp., that went bankrupt.

Entropy: Ride off into the sunset

In entropy, the bigbang process comes full circle. The old industry is dead, and a new one has risen from the ashes. Some incumbents are gone, new ones are created and supply chains are transformed into ecosystems. The new industry now waits for pressure to build and technology to advance through a new generation of failed market experiments, signaling the start of the next shift.

For further reading

“Big Bang Disruption” by Larry Downes and Paul F. Nunes, Harvard Business Review (March 2013): http://hbr.org/2013/03/big-bang-disruption/

Accenture Technology Vision 2013: The Latest IT Trends and Innovations: http://www.accenture.com/us-en/technology/technology-labs/Pages/insight-technology-vision-2013.aspx

The Laws of Disruption: Harnessing the New Forces that Govern Life and Business in the Digital Age by Larry Downes (Basic Books, 2009)



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Companies must look closely at the phenomenon of industry sunset. How do assets get liquidated? How do old technologies and the facilities needed to manufacture and distribute them get recycled or retired? What financial tools are available to smooth the transition, even for industries that are “too big to fail”?

For industries in sunset, the entire supply chain is affected. Often, it is distributors, agents, retailers, financiers and others indirectly involved in the actual production of obsolete products who feel the full impact of bigbang disruption first and most acutely.

While smartphone makers now sell billions of products, that volume is dwarfed by those who sell the peripheral products—cases, headphones, chargers—and service contracts, network connections and apps, not to mention the component parts. All of these providers need to consider the potential bigbang disrupters of their fountainhead, and the need to balance the past with the possible future.

In the new diversification, the successful launch of a bigbang disruption only buys you a license to try again. And in doing so, your biggest competition becomes your own success. Serial bigbang disrupters effectively put themselves out of business first, emerging as new enterprises that share the same name but often little else. Successful brand associations and truthteller networks may be their most valuable assets.

Vital to the new incumbents’ ability to launch more bigbang disruptions: leveraging disruptive technology and abstracting the business model (along with its marketing, human

resources and IT systems) so that the business overall is reimagined as a platform for a wide range of other businesses—which companies such as Amazon have done successfully.

In the end, the collapse of the old market is as dramatic as the uptake of the new market. One incumbent often remains, servicing the needs of older customers and sentimentalists who buy or keep the old products out of a sense of nostalgia. But only one.

As with any such change of this magnitude, we are only beginning to appreciate the myriad implications of the rise of bigbang disrupters. There are numerous details of strategy and risk management in each of the four phases that we have only begun to touch on here. Executives must ascertain the movement of disrupters in their own industries, and begin to put in place the capabilities necessary for success in a world that doesn’t play by the old rules of business.

Embracing the new rules that underpin a bigbang strategy is not for the faint of heart. It will take commitment, vision and a strong constitution. Because while bigbang disrupters are at times predictable, and their effects at times felt early, their ability to upend in an instant is profound. Business managers should heed the tacit warning given by a character in Ernest Hemingway’s novel, The Sun Also Rises, about the ways businesses fail. When asked how he went bankrupt, he replies, “Two ways. Gradually and then suddenly.”

About the authors

Paul F. Nunes is the managing director of research for the Accenture Institute for High Performance. He is based in Boston. [email protected]

Larry Downes, a fellow with the Accenture Institute for High Performance, is based in Silicon Valley. [email protected]


The art of managing innovation risk By Adi Alon, Wouter Koetzier and Steve Culp

Improvisation and experimentation can lead to big, breakthrough innovation. And innovation, fused with an agile, sophisticated approach to risk management, can create a powerful, value-driving partnership.

Risk Management

Risk Management


For example, fully 64 percent of the 519 companies in Accenture’s 2012 innovation survey—a cross-industry sample of US, UK and French players—are still focusing largely on line extensions. Only 20 percent view their innovation efforts as potential game changers. And just 18 percent say they are using innovation to drive competitive advantage.

Some, of course, would argue that responsible risk management necessitates a cautious approach to innovation. Only startups, they say, can afford to court the risk of failure. Global companies are complex entities, held together by a web of controls. Loosening those controls to give innovation teams free rein could incur unacceptable risks and costs, not only for the company but for its various stake-holders as well.

That’s why so many big companies opt to reduce uncertainty by leveraging a traditional, stage-gate innovation process.

Stage gates are designed to identify the best ideas by putting them through multiple reviews, or gates. In principle, there’s absolutely nothing wrong with the concept—quite the contrary. Stage gates provide a discipline and a structure for identifying problems early in a project’s life, and allow the project’s sponsors

to keep constant track of the evolving business case.

The problem, however, is the evaluation criteria typically used at each gate. Few decision makers want to take responsibility for a failed experiment, so extreme caution usually prevails when new ideas are assessed. Opportunities tend to be defined narrowly.

Moreover, the tools commonly used to support the process exacerbate the problem. Based on retrospective analytics—Net Present Value (NPV) models, for instance, are built on market projections that are calculated using past trends—they tend to skew innovation decisions toward optimizing existing product lines rather than pursuing new ones.

As a result, promising ideas are often smothered. And while many of the innovation initiatives that do gain approval are low risk, they offer only low returns—incremental improvements that usually do little more than maintain market share.

The right modelFor most companies, the big, break-through innovations that deliver new benefits to customers and thus create new markets—the sort of innovation exhibited by Dell when it pioneered the direct distribution model for PCs, or by Apple with its iconic iPad—remain elusive indeed.

Innovation can be a company’s most powerful tool and a key driver of value. Yet many executives, fearful of the risks inherent in pursuing edgy new ideas that may not succeed, hesitate to unleash its full potential. They prefer, indeed, to renovate rather than to innovate.

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So what do the innovation masters do differently?

Recent Accenture research shows that highly innovative companies are essentially no more likely to embrace risk than their less innovative peers (see sidebar, page 62). But when we investigated further, we found that they approach the management of innovation risk differently—and that their business models are critical factors in their success.

Consider, for example, the business model employed by the venture capital industry, which finances most startups. These players know that most early-stage experiments

will founder—but they also know that the fruits of just one or two such experiments could earn back the investment of their entire portfolio (and then some).

So venture capitalists take an active approach to managing the risks of their investment portfolios, systematically measuring those risks to generate returns. They engage dynamically with their portfolio companies. Rather than killing a project that’s running into difficulties, they try alternative solutions. But they also move swiftly and decisively to close failures, while doubling down on ideas with promise—and encouraging ongoing experimentation.

With the planet’s population growing relentlessly and available farmland in sharp decline, biotech solutions that can increase crop yields have become a serious business. Yet 30 years ago, when St. Louis-based Monsanto Co. first recognized biotech’s potential significance for its burgeoning seed business, such genetic modifications were largely unproven, and investing in them was considered risky indeed. That’s why the US agribusiness giant decided to hedge its bets. Monsanto couldn’t know which of the many biotech ventures then sprouting would actually bear fruit. But by building up a portfolio of relatively modest investments in a few biotech experiments—among them, California-based Genentech and (then) Geneva-based Biogen—it could acquire knowledge of basic technologies.

The experience gained from participating in such early (and largely successful) experiments encouraged Monsanto to develop its own biotech capabilities. In 1984, the company opened a life science research center in Chesterfield, Missouri. And three years later, its scientists conducted the first-ever US field trials of plants with engineered traits.

By the early 1990s, Monsanto was starting to reap the rewards of its portfolio through research collaborations

and the acquisition of technology licenses. And by the end of the decade, it was realizing still more value by acquiring biotech delivery vehicles, genetic enabling technologies and processing capabilities.

Cases in point: the 1998 purchases of DeKalb Genetics Corp., the Illinois-based hybrid corn specialist, and Minnesota-based agribusiness Cargill’s global seed business—an acquisition that gave Monsanto access to sales and distribution networks in 51 countries. At the same time, Monsanto formed a joint venture with Cargill to create and market new biotech products for the international grain processing and animal feed markets.

Today, Monsanto is an outstanding example of a company that has merged innovation and risk management successfully— a leading practitioner of the sort of proactive approach to the latter that can fuel true breakthroughs (see story).

Thanks to R&D investments in excess of $1 billion a year, the company boasts one of the most comprehensive product pipelines in the agricultural biotech industry. And its biotech-driven seed business accounts for almost three-quarters of its annual revenues, which topped $13.5 billion in FY 2012.

Monsanto: Capturing value from biotech innovation

Risk Management


Big companies are obviously differ-ent. Larger, slower and subject to the constraints inherent in managing their core businesses successfully, they can’t act exactly like startup investors. But they can afford to modify their stage-gate processes to drive more effective innovation. And they do have much to learn from the venture capital industry’s bold yet disciplined approach to innovation risk management—an approach that has created such groundbreakers as Amazon.com and Facebook.

Leading players recognize that far from stymieing innovation, sophisticated, state-of-the-art risk management tools, techniques

and models, including small-scale experimentation and portfolio management, can actually help encourage it. They know that by fusing such a risk management approach with innovation, they can create a powerful, value- driving partnership.

They focus their innovation risk management efforts on three key business areas.

Governance

A corporate culture that only celebrates success can discourage innovation by making people nervous about taking risks—yet

When Salesforce.com was launched back in 1999, the San Francisco-based startup quickly established itself as a leading innovator of cloud-based CRM applications. Indeed, within a year or two, it was launching four major software releases annually and earning many accolades for innovation excellence.

Five years later, however, the pace of innovation had slowed dramatically, to just one major release a year.

Company management realized that as the R&D team had grown—it was 200 strong by 2004—it had become less productive. The team’s phase-based, functionally organized process, which was largely dependent on a few key decision makers, had worked well with a small team but wasn’t working for a significantly larger one. In fact, many people in R&D hadn’t even participated in a major release, missing important learning opportunities. And as the number of releases declined, so did morale.

Which is why Salesforce.com resolved to transform its innovation process by adopting a more agile approach, leveraging self-organized, cross-functional teams and testing new applications, iteratively, with customers. Risk management, the company believed, would not be compromised under the revamped approach.

The agile development transformation, which enjoyed the full support of top executives, was an unqualified success. Within three months of rollout in 2006, teams empowered by a simple, agile process with a common language were leveraging customer insights to develop potentially releasable products every 30 days. What’s more, they had dramatically reduced the number of “bugs” that would later need to be addressed—a potentially costly business in terms of both time and engineering resources.

Significantly, innovation team members enjoyed daily transparency into metrics around product performance. They also met in regular group sessions to review the release progress—and learn from their mistakes, a key enabler of good governance for companies seeking to drive innovation by managing risks more effectively (see story).

With 2012 revenue in excess of $2 billion and more than 100,000 customers, Salesforce.com is now widely considered the global leader in enterprise cloud computing— a position powered by a pace of innovation that persuaded Forbes to name it “most innovative company in the world” in both 2011 and 2012.

Salesforce.com: Harnessing agility to restore innovation prowess


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Support creativity by encouraging openness about errors and rewarding those who genuinely learn from their failures.

no rational organization would reward failure. Or would they?

Some companies have recognized that they can allow innovation teams to make strategically intelligent mistakes within a clearly understood governance framework. This, in turn, enables a culture that not only tolerates risk but also embraces failure as an integral part of the innova-tion process.

For instance, a large advertising agency awards a quarterly Heroic Failure trophy to recognize clever, unproven ideas that may not work out in practice but nevertheless demonstrate creative risk taking.And an online payroll provider offers $400 to the winner of its Best New Mistake award, which goes to an employee who made a mistake but learned from it—and, in doing so, helped other employees avoid similar mistakes.The idea behind both awards is to support creativity by encouraging openness about errors and rewarding those who genuinely learn from their failures.

Some companies also provide physical spaces—game, nap or meditation rooms—or specific time slots during which employees can feel free to be creative. The advertising agency, for example, blocks off a “no meeting zone” every Thursday morning.

Big companies, by contrast, tend to fence off the innovation process by setting up separate innovation units that operate, in effect, like venture capital funds. Cases in point: the $2 billion Novartis Venture Funds, a wholly owned subsidiary of the healthcare products company that reports to a dedicated advisory board comprised

of mostly external members; and Intel Capital, a $2.1 billion fund that reports directly to the tech giant’s CEO. While these arrange-ments have had clear successes, they may be leaving some upside on the table.

The risks of such arrangements are well managed, thanks in part to their governance. But we believe that companies could drive even greater benefits by incorporating the management of innovation risk into the organi-zation as a whole.

That would help fuel innovation from the bottom up, while ensuring that everyone in the company understands what’s being funded, how, when and why. It could also bridge the gap (common in big organizations) between a risk-averse finance unit and those operating units—whether marketing, operations or product development—on the innovation front line.

Indeed, risk management groups could work as standard setters, providing a common language the business could use to translate strategic challenges into specific, measurable risks, and providing such risk governance expertise as oversight committees and assessment procedures.

Portfolio

Just as a venture capitalist invests in a broad portfolio of companies before knowing which of these investments will actually pan out, a company can build a portfolio of early innovation experiments that act, in effect, like options.

Missouri-based Monsanto, for example, has been building

Risk Management


a portfolio of biotechnology investments since the 1980s. As a result, biotech now anchors its highly successful seed business (see sidebar, page 59).

Corning, meanwhile, launched a similar strategy even earlier—back in 1959—by investing in a technology for safer vehicle windshields. The New York-based glassmaker’s groundbreaking invention was priced out of the auto market a decade or so later. But essentially the same technology is used to manufacture LCD panels—which gave Corning a competitive advantage when LCD subsequently became the dominant display technology in most consumer devices.

Such companies don’t make their innovation investment decisions

by looking backward. But neither do they throw caution to the winds. Instead, they use risk management methodologies and tools to measure uncertainty— both positive and negative—and to provide realistic estimates of outcomes that can facilitate decision making.

By continually assessing value against multiple variables and scenarios, predictive analytics can help guide these complex decisions. Risk scenario (or simulation) analysis, for example, is a structured, forward-looking process designed, unlike traditional SWOT analysis (a structured planning method used to evaluate strengths, weaknesses, opportunities and threats), to discover how multiple factors combine to create both vulnerability and opportunity.

For further reading

“The Risk Masters,” Outlook 2011, No. 3: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2011- risk-masters-risk-management.aspx


How risk-prone are the innovators? No more so than anyone else, according to Accenture research.

Indeed, when we examined the 60 US public companies among the 100 included in Forbes ’ list of the world’s most innovative companies, we found that their beta value—a measure of a company’s share value volatility relative to market volatility—is only slightly higher than the market average.

A beta of 1 indicates that a company’s share price will move with market fluctuations, and the beta of the most innovative players averaged only 1.1, clearly tracking the overall market. Neither did we find any correlation between a company’s beta and its position on the Forbes list.

The Forbes ranking looks beyond such usual measures of corporate innovation as executive and employee perceptions to how investors perceive risk, measuring how much they have bid up a company’s stock price on expec-tations of new products, services and markets—or the “innovation premium” they ascribe to their investments. But, on average, there is no correlation between the beta levels of leading innovators and the level of the innovation premium index. In short, a higher innovation ranking does not translate into higher risk.

About the research


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Take, for instance, the large, global software company that used a structured simulation to improve planning for unanticipated and overlapping responses among its partners and customers to a product launch. The analysis helped identify potential gaps in the company’s ability to respond, and gave it greater insight into the roles, responsibilities, decision-making criteria and interactions of different stakeholders.

Process

With product lifecycles across industries shortening, successful innovation often hinges on speed. And that, in turn, requires a risk management process that can shorten learning cycles, recognize failures early and make timely course corrections— a process that facilitates a companywide dialogue around which risks are acceptable and how much risk is appropriate, based on potential returns.

At Corning, for example, the company’s R&D, engineering, manufacturing and commercial expertise are all harnessed in support of the innovation process, from earliest ideation right through to commercialization. What’s more, senior management participates throughout, facilitating swift decision making and significantly reducing the time it takes to launch projects.

With risks well managed, companies can then use rapid experimentation and the techniques of agile development—an iterative process closely linked to customers and markets—to boost their chances of coming up with a truly profitable innovation portfolio.

That’s what California-based Salesforce.com did when man-agement decided to jettison the traditional stage-gate innovation process in favor of agile develop-ment. In fact, since the enterprise software maven began working iteratively with the market through frequent testing, its innovation prowess has started to return to the high-octane levels of the company’s early years (see sidebar, page 60.)

Most companies today have come to recognize that sophisticated risk management is a key enabler of long-term growth and profitability. What’s more, some companies have put in place advanced capabilities to manage their innovation risks successfully.

Few, however, have developed the agile, iterative approach that can drive breakthrough innovation rather than drowning it—or have created the risk-tolerant, organization-wide governance structures that allow such capabilities to flourish. But growing numbers realize that with such systems in place, they could be confident that their innovation risks were transparent and well managed. And they, too, could start creating dynamic portfolios of innovative ideas and experiments—and commit the funds to bring the best of them to market.

About the authors

Adi Alon is a Boston-based managing director in Accenture’s Innovation Performance group. [email protected] Wouter Koetzier leads Accenture’s Innovation & Product Development group. He is based in [email protected]

Steve Culp leads Accenture’s Risk Management group. He is based in [email protected]


A better way to resolve business conflicts By Anoop Sagoo, Jeremy Oates and Mary Lacity


Having a realistic perspective that life is not perfect is a good thing—whether you’re a service provider or a client. The ability to settle the smaller issues promptly and productively lays the groundwork for dealing with more serious, potentially deal-breaking problems that may arise down the road.

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And a recent study has shown that 60 percent of companies worldwide now deploy outsourcing as a standard practice; an additional 19 percent say outsourcing is definitely in their future.

As executives adjust to the fact that relationship building is a significant part of their job description, they are running into the challenge that all relationships, human or corporate, encounter at some point: stuff happens—obligations can be misin-terpreted; people don’t always get along; expectations can conflict.

Then what?

In some cases, organizations involved in long-term business relationships such as outsourcing have learned how to resolve conflicts effectively—overcoming immediate challenges and ultimately strength-ening the overall relationship. In other cases, however, problems have spiraled out of control, resulting in lawsuits and damages in the hundreds of millions of dollars.

Accenture research points to signifi-cant differences in how clients and providers in outsourcing relation-ships approach conflict resolution. On the one hand, there are what we call “aggressive” approaches, which focus on maximizing the short-term commercial interests of one side of the relationship. On the other hand, “balanced” and “collaborative” approaches—approaches to resolution that are no less conscious of the significant business implications

and costs involved—are able to forge a path that keeps the rela-tionship viable and helps it thrive in the long term.

Issues and conflictsFirst, some perspective. It would be highly inaccurate to portray out-sourcing or other types of long-term business relationships as somehow inherently vexed or inevitably prob-lematic. Indeed, most of the providers and customers we spoke to in our research told us that they seldom if ever had significant conflicts.

That’s because not every little misstep is a deal killer. One impor-tant distinction to make is between “issues” and “conflicts.” Every business relationship is going to encounter minor issues: a service lapse, a project delay, a difficult interpersonal relationship, even something as mundane as a team member speaking disrespectfully or wearing too much perfume. Those are irritations, not conflicts.

When looking at a long-term rela-tionship, both sides need to begin by acknowledging that such irritations are not a reason for escalation to a governance resolution committee. Understanding that life is not perfect is a good thing—whether you’re a leader of a service provider or a client. Being able to resolve those smaller issues productively and in a timely manner lays the groundwork for dealing with the more serious problems that may arise down the road—problems that may be a source of true conflict.

Most companies today have business relation-ships with multiple partners and collaborators. The number of strategic alliances across most industries, for example, has grown steadily over the past decade.

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Based on our research and conversations with executives, more serious conflicts generally arise for one or more of the following reasons.

Contract wounds

A lengthy contracting phase— say, more than a year—can end up being contentious and even exhausting to those involved, leaving wounds on both sides that then affect the attitudes of those who have to pick up the pieces and actually deliver the new outsourced service. Protracted, unpleasant negotiations can, as one executive puts it, leave “the sort of smell that never goes away.”

Unrealistic expectations

Previous research into outsourcing, focused on IT services, pointed to a situation dubbed the “winner’s curse” in the bidding and selection process. That is, a provider may “win” a contract after a difficult bidding war or auction. But then that provider—now forced to deliver services at little margin or even at a loss—may be severely challenged to maintain sufficient levels of delivery quality to build a long-term relationship with the client. Providers also sometimes feel pushed by clients to render out-of-scope services for free, pressured by the argument that “this should be part of the provider’s added value.”

With one IT outsourcing relationship we studied, the client’s extensive experience procuring products and services led it to adopt a purely contract-controlled, power-wielding approach. This ultimately failed and

led to the breakdown of relations. The provider needed more guidance in understanding the client’s operations, and the parties should have worked together to clarify the client’s requirements and idiosyncrasies. Because this did not happen, significant conflict arose between the account managers. Service levels were low, and the provider lost money.

For clients, pricing issues—for example, sticker shock over a large invoice—were a more common source of conflict. Clients have reported being invoiced for services they considered in-scope or for calculations about improved performance (which would then trigger gainsharing payments) they considered inflated.

Insufficient information

The situation in the aforementioned IT outsourcing example was exacerbated because the client was replacing an existing provider. The incumbent knew precisely what the service provisions would entail, as did the client, but the new provider had to make its bid using only partial information from the client and competitor. As a result, the winning low bid was based on incomplete, incorrect and outdated information, which then had ramifications for the level of service the new provider could deliver.

Even in cases that do not involve unseating an incumbent, a provider can suffer from insufficient trans-parency into the client’s overall IT situation. Providers sometimes must bid on the basis of incomplete information because the IT or business process environment is

Sources of conflict



When conflicts occur in an outsourcing relationship, how the parties approach resolution is crucial. We found three common approaches to resolving significant conflicts: aggressive, balanced and collaborative.

Aggressive

Aggressive conflict-resolution approaches are characterized by a party’s spirited defense of its own commercial interests, without consideration of the effect on the other party’s commercial interests.

It’s more like haggling over the price of a used car than talking about the potential value to be produced by an outsourcing arrangement. One party digs in its heels, and the other party normally reacts with a similarly aggressive stance. At best, this approach produces results that weaken the relationship; at worst, it leaves the partnership mortally wounded.

In one situation, for example, the client and provider escalated the fight over gainshare calculations to a formal dispute. The provider calculated a multimillion-dollar

gainshare, claiming it should be paid for new products and pointing to new material codes as evidence. The client refused to pay, claiming that it was purchasing the same material and that the vendor was simply using different product codes on the newer models. Was it new wine or just old wine in new skins? Differences of opinion on the matter eventually resulted in a conflict that escalated to a formal dispute.

This aggressive approach resolved the conflict, but the partnership was weakened, according to the client: “It went all the way to dispute

highly integrated in a way that spans multiple functions, departments and geographies, making it difficult to objectively evaluate the actual service costs and technical requirements of parts of that environment. Pricing based on unfounded assumptions about expected service volumes can result in low margins or losses for the provider, prompting a conflict.

Problems with inherited processes

Conflicts can also arise in business process outsourcing arrangements because the BPO provider is held to service-level agreements for an entire process—say, procure-to-pay in a finance outsourcing deal—but may not actually have control over everything. Parts of the process may be run by the client, others by a third party. Indeed, though it is hardly a best practice, the provider may be operating a process that was actually inherited from the client, whether or not it was the optimal way to do things.

One executive from a finance BPO provider recalls the fateful moment when he received an escalation call from the client’s COO. Problems in accounts payable had resulted in suppliers not getting paid, with penalties and lost discounts happening left and right. “We immediately doubled the workforce on point to address the situation,” recalls the executive, “and got the situation under control. Yet our analysis showed that one in three invoices had problems on submission that caused them to be rejected for processing.”

Benchmarking

Conflicts can also emerge when either side of the outsourcing relationship misuses external benchmarking results. Clients may contend that, based on the benchmark, prices are inflated. The provider may dispute the bench-mark, claiming the comparison is unfair. For example, in one case,

a client claimed that based on a current benchmark, its provider’s price per function-point (a measure of a unit of software) was high. The provider argued that the benchmark might be appropriate for an environment based on newer technologies, but that it had to maintain the client’s old information systems. The provider could not meet the best-in-breed price without seriously eroding its margin.

Another provider responded to a pricing conflict prompted by a benchmark by pointing out that a provider’s margin is averaged over an entire basket of services. Although the basket is fairly priced overall, within the basket, some services will be overpriced and some will be underpriced. According to one legal advisor we interviewed: “Objective benchmarks don’t help when one or both parties are hurting. The parties need a mediator to help negotiate what changes might be needed.”

Resolving conflicts: Three approaches


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process, and it left an incredibly bitter taste with our executive team.” Eventually, the client switched providers and negotiated a better gainsharing mechanism with its new partner.

Executives we interviewed were quick to point out that conflict resolution can often result in a stronger outsourcing relationship—just as, in human relationships, the ability to face adversity together can bring people closer. However, this positive interpretation of conflict was never an outcome when the two parties took the aggressive approach to resolution.

As one provider executive puts it, “In most cases, there is shared responsibility between client and provider when things go wrong, but what may happen is a great deal of posturing and positioning to put one side or another in the best light. That’s when, instead of sitting down face-to-face to resolve matters to both parties’ benefit, you begin to get the official letters written by legal teams. Then almost inevitably, you’re on a path where someone is going to win and someone is going to lose. And from one point of view, everyone then loses.”

Balanced

If the aggressive approach is characterized by the need to win every battle, the balanced approach takes an attitude that, over the life of the outsourcing relationship, “you win some, you lose some.” That is, advantages temporarily won by one side or the other tend to even out over time. Clients and providers are tough but fair negotiators. When conflicts arise, they are resolved quickly and often result in strengthening the partnership.

In one healthy BPO relationship we studied, we found ongoing cycles of give-and-take. For example, the provider did not charge a client for five extra staff people it added to meet an unanticipated surge in service volume. A few weeks later, the client did not demand service credits when the provider missed a performance metric. Both parties feel that the overall commercial relationship is fair and mutually beneficial. In a way, this approach is reminiscent of how friends may alternate in picking up the check when they go to lunch over the course of a year.

Though a balanced approach is certainly better than the scorched-earth approach of aggressive negotiating, its weakness is that it can result in a situation where the quality of the overall service—and of the relationship—does not necessarily get better.

Collaborative

Collaborative approaches to conflict resolution are characterized by close partnerships in which both sides seek to understand each other’s concerns. Account executives from both client and provider look for a win-win solution and then, together, present a united front to sell the solution to their respective organizations. In this approach, conflicts can be resolved in a way that actually strengthens the partnership in the long run.

While the collaborative approach is the most desirable approach, it requires deep commitments from both parties. In fact, in some high-performing BPO relationships, the partners do not even call circumstances that could adversely affect one of the parties’ commercial



Where collaborative approaches to conflict resolution are in place for outsourcing partners, we see a number of common rules of engagement.

We’re in this together

Attitudes affect intentions, and intentions affect behavior. Collabora-tive approaches to conflict resolution therefore begin with an attitude that can be called a “partnership view”—one in which a client regards the provider as a strategic partner rather than as an opportunistic vendor. This mindset results in certain behaviors—such as resolving conflicts fairly and protecting both parties’ commercial interests—that produce better long-term results for both the client and the provider.

Here’s how one provider executive describes what he calls “the true partnership” his company has with one BPO client: “They

understand what our cost drivers are, and they realize it’s a zero-sum game. They know that if they want more value someplace else, we have to work together on what our goals and priorities need to be and how we best allocate spending to achieve those goals.”

At one point in the relationship, when a conflict arose over how savings were to be calculated, having that partnership view in place was important in achieving resolution. According to the provider executive, “We basically said, ‘Okay, we understand you better.’ And they said, ‘We understand that you need to claim value, so let’s work together to define a little more clearly what value means.’ ”

All problems are “our” problems

The foundation for collaborative conflict resolution is built by the

Rules of engagement

interests a conflict—they consider them problems to be solved.

The client in one finance outsourcing arrangement we studied claims there has never been a significant conflict. He says: “We’ve always sat down and found a common ground or financial outcome that is in our mutual interest. Obviously, there are times when I’ve said, ‘Enough is enough, this is as far as I go.’ I explained why I think it is fair, why I won’t go any further. I never had the provider coming back and saying ‘no way’ on that.”

Do these partners argue? Of course—particularly when a situ-ation has significant commercial

implications. In one instance, after back-and-forth debates, one client and its provider agreed that they had to find a commonsense solution to a particular problem rather than relying on the letter of the contract. The parties split a settlement.

The lesson here is that a contract model does not necessarily produce a “fact” that is understood and agreed to by all sides but instead produces a starting point for a conversation. Ideally, the client lead and the provider account executive will attempt to work out an equitable approach before conflicts get escalated to a formal grievance hearing in front of a governance board.


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way partners resolve service issues. In effective outsourcing relation-ships, the partners view any problem as a shared problem. Rather than starting with commercial demands, the two sides perform a root-cause analysis, then identify the best solution that keeps both sides’ commercial interests at the forefront.

One provider elaborates: “The client is very open when they are not getting an outcome that they want. That allows us to look at the problem not just in terms of what’s in scope or what’s not. Instead, we work together to stay focused on the outcome we’re both looking for. What do we want, and how do we work together to achieve that?”

In our research, we saw evidence of many business relationships that had mastered collaborative conflict resolution. At one global finance outsourcing program, the client and provider reported that although the transition to outsourcing generally went well, the internal help desk became overwhelmed by the volume of calls and the percentage of escalated calls. Rather than immediately blame the provider, the client offered to take back the help desk duties temporarily to give the provider time to address the situation.

One client executive explains the benefit of the collaborative approach this way: “Other clients might have said [to the provider], ‘This is your problem, don’t bother me.’ My attitude instead was, ‘We are in this together.’ I find that the [provider’s] folks come to the table and are open and honest about what they are doing.” That attitude paid off. The provider diagnosed the problem, and the partners developed an interim

fix as well as a long-term plan to improve service.

As much as possible, operate based on facts not emotions

When things go wrong, emotions often run high. Business might be suffering. People might feel—perhaps rightly—that their jobs, reputations and careers are on the line.

An important first step is to get all the facts out so that subsequent discussions move beyond emotions to reasonable interpretations of those facts and then to what needs to be done to resolve the situation.

“Good governance structures are essential,” says one executive, “having set procedures and policies for making decisions when a wheel goes off the track.” But you also need to have the two most senior executives from both sides be willing to sit down together in private to work things out. Adds the executive, “Sometimes, conflict resolution between two multibillion-dollar enterprises with lots at stake can really come down to two people sitting down over coffee and working it out. You need good governance, don’t get me wrong; over time, you don’t want every major decision being made by two people over an espresso. But there really are times when major conflicts can be avoided when you have large-spirited people who have the vision and courage to keep the big picture in mind at all times.”

A relationship manager has a full-time or near-full-time role

As noted, the pricing and contractual phase of the relationship can create an adversarial environment.



Providers are sometimes uncertain that they can even recover their costs, much less make margins. In these cases, the provider will need to concentrate disproportionately on recovering costs, under pressure from senior managers, a situation that results in trade-offs not ultimately beneficial to the client. Concern over cost containment can lead to inflexibility in interpreting the letter and spirit of the contract, which, in turn, can lead to an adversarial relationship.

The solution for one troubled IT outsourcing arrangement we studied was the appointment by the client of a full-time relationship manager. Part of that manager’s job was aligning the provider’s organizational structure with the client’s. The client simply had taken the structure of the incumbent supplier and moved it over to the new supplier—a situation that did not succeed at all. Consequently, the client formalized its management reporting processes, outlining senior management meetings at which supplier performance would be monitored and reviewed. That would then determine when payments and bonuses got paid.

The partners are transparent

Collaborative approaches to resolving issues or conflicts require high levels of trust and honesty. From a practical perspective, that means being transparent about a range of issues from general goals to specific pricing concerns.

Transparency was one of the top three things interviewees cited when asked about the secrets to great collaboration. In the words of a delivery manager at a provider for a global technology conglomerate,

“We know exactly what the client is looking for because they are open with us about the key performance indicators they’re being measured on. That way, we can then say, ‘Let’s figure out a way we can work together on hitting those metrics.’ ”

The partners care about and protect each other’s commercial interests

In collaborative approaches to conflict resolution, each side cares about the other’s commercial interests. This is not mere altruism; it is actually in the client’s best interest to care about and protect the provider’s commercial interests, and vice versa, because service performance is tied to financial performance.

The need to be concerned with each other’s financial viability was confirmed by earlier research we conducted into IT outsourcing. In that research, for example, we investigated what happened to outsourcing performance when providers failed to meet their margins. In 15 cases of missed provider margins, 80 percent reported poor outsourcing performance. In 70 cases when the provider met its target margins, only 27 percent reported poor outsourcing performance.

Since the aim was to create a new commercial deal that benefited both parties, partners were willing to renegotiate when one party was financially disadvantaged. In one IT outsourcing arrangement we studied, the provider had made a number of naïve assumptions about the work involved and the resources that would be necessary. The provider had no choice but to alert the client and request an early contract renegotiation. The client responded

For further reading

“Masters of the mix,” Outlook 2013, No. 1: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2013-masters-of-the-mix-outsourcing.aspx

“Partners in high performance,” Outlook 2012, No. 2: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2012-partners-in-high-performance-outsourcing-bpo.aspx



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favorably. Although the renegotiation phase was stressful for both parties, the ultimate outcome was, in fact, a positive experience for the long-term relationship.

On one account, the initial contract was priced using different rate cards for different types of work. After the transition, the client came to the provider and explained that its business case was not being met because it had underestimated the complexity of the pricing mechanism and the range of skills needed. The client asked to rene-gotiate the pricing mechanism. The provider agreed to a flat rate card in exchange for a longer contract and an increased scope of work. Both parties negotiated a better deal, and the relationship is now a high-performing one.

As we have noted, true conflicts—circumstances that put the commercial interests of one of the parties at high risk—are not common in outsourcing relationships. Indeed, many of the partnerships in our case study research have never experienced a significant conflict. Nonetheless, just one serious conflict can, if not successfully resolved, cost a party hundreds of millions of dollars.

As the outsourcing market evolves into more sophisticated pricing models and broader scopes of services, some miscalculations and unfounded assumptions are to be expected, even if only occasionally. Preparing for potential problems by learning about the collaborative approach to conflict resolution is a little like buying flood insurance—the risk of your home flooding may be only one in 1,000, but it is comforting to know you’re covered.

About the authors

Anoop Sagoo is the Accenture Business Process Outsourcing area lead for the Asia-Pacific region. He is based in [email protected] Jeremy Oates is the Accenture Technology area lead for Europe, Africa and Latin America. He is based in [email protected]

Mary Lacity is Curators’ Professor of information systems at the University of Missouri-St. [email protected]



A healthy talent advantage By David Smith, Breck Marshall and J.P. Stephan

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The challenges are daunting. But by weaving healthcare coverage decisions into their talent strategies, and by managing the implications of the Affordable Care Act as a strategic change program, US companies can capitalize on opportunities to create a unique value proposition for current and prospective employees.



Today, senior-level leaders, and not just their HR departments, find themselves wrestling with the implications of the Affordable Care Act—the national healthcare plan approved by the US Congress during President Obama’s first term.

The legislation has confronted employers with a welter of com-plexities and seemingly endless questions on matters ranging from portability to penalties for noncompliance. Depending on your answers to these questions, your company may or may not want to continue offering its own healthcare coverage. You may or may not wish to provide employees with access to a health insurance exchange. You may or may not need to pay a penalty.

And you may or may not feel the need to take a long vacation after deliberating on these matters.

As challenging as these healthcare changes are in the short term, they also offer an opportunity to create a unique value proposition for a company’s current and prospective employees. By weaving healthcare coverage decisions into their talent strategies, and by managing the new healthcare situation as a strategic change program, companies can capitalize on opportunities to create a talent advantage.

Complacent and confusedBeyond all of the new rules and regulations, an important concern for executives planning a proactive response to new healthcare options

is that a certain complacency about the coming changes can be seen among employees. The Affordable Care Act will introduce approximately 51 million people to the individual healthcare marketplace, shifting industry dominance away from employer plans and from a wholesale to a retail model. Yet the implications for both cost and personal respon-sibility are only dimly understood, by employee and employer alike.

According to a recent Accenture healthcare study, almost two-thirds (62 percent) of all consumers in the healthcare marketplace list “afford-ability” as their top concern when it comes to choosing a healthcare plan. Yet only 20 percent are willing to change their primary care doctor for regular office visits, and only 39 percent are willing to use a nurse practitioner instead of a doctor for routine health checkups. These are some of the most obvious steps con-sumers can take to make their plans more affordable, but relatively few actually wish to change their habits and routines (see chart, opposite).

Other research paints an even grimmer picture—one of almost total bewilderment among average citizens. In 2012, pollsters from Stanford University quizzed thousands of Americans about the basics of the new healthcare legislation, including identifying statements according to whether they were or were not part of the actual law. Zero percent—that’s right, no one—answered all of the questions correctly. Only 14 percent of respondents were

There are a lot of things that keep executives awake at night, but employee healthcare benefits traditionally has not been in the top 10. In the United States, however, that situation has changed.

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able to answer even a simple majority of questions correctly with a high degree of certainty.

What does this complacency and confusion mean? In part, it underscores the need by companies to approach the new healthcare situation as a major organizational change program, not simply as a benefits-related event confined to the HR sphere or something that can be addressed by making a few classes or online knowledge resources available.

The talent advantageThis is where the opportunity arises to transform the healthcare challenge into a talent advantage. HR admin-istrators and staff will continue to advise employees about healthcare benefits. But a typical company is likely to remain fairly passive and

reactive in terms of the guidance provided by HR.

By contrast, companies seeking an advantage in recruitment and retention will take the time to understand their workforce, not monolithically but in a way more attuned to different segments of the employee population with different circumstances and healthcare needs. In this way, HR representatives can offer more proactive and helpful guidance.

Such companies will also prepare their frontline managers and other supervisors to be agents of change. This means coaching them about the impact of health-care reform on the organization and its people so that they, in turn, can set expectations with employees, be positive rather than

disparaging about the situation, help people understand and take ownership of the impact, and in general help employees feel like an active part of the change rather than its passive victim.

Formulate a strategy

When thinking about the implications of healthcare legislation for your talent strategy, you should ask a series of important questions that support more effective decisions.

1. What are your industry’s unique talent needs?

It is important to consider the par-ticular talent attraction and retention strategies unique to your industry and business. In the services and

Mixed signals According to the 2012 Accenture Healthcare Consumer Survey, 62 percent of consumers are most concerned about the affordability of their healthcare. . .

Percent ranking these factors most important in their choice of a healthcare program

14

62%

3

21

Access

Quality

None of the above

Affordability

Source: 2012 Accenture Healthcare Consumer Study

Change the hospital where I would go for inpatient care

45%

Use a primary care doctor instead of a specialist

42

Use a nurse practioner instead of a doctor for routine visits

39

Change the primary care doctor that I see for regular office visits

20

. . . but low percentages are willing to make basic changes in their use of healthcare resources to reduce their cost of coverage.

Percent who indicated willingness to make the following changes to save money on healthcare



retail sectors, for example, turnover is generally high (from 20 percent to 35 percent or even more) and workers are often young. (In the grocery business, one-third of workers are between the ages of 16 and 24.)

The talent strategies of high-tech, Silicon Valley-type companies are strongly influenced by the presence of Millennials in the workforce— most of whom presume they won’t work their entire lives for the

In 2012, Accenture conducted an online survey of 3,200 consumers to understand their expectations and preferences related to healthcare insurance. Advanced analytics were

used to identify five distinct consumer segments. This segmentation can be used by insurers, but also by employers to better understand the needs of their employees.

Disengaged:

Why do I need to do anything different? I’m covered.

Value-gamers:

Let’s see how I can get the most value for me and my family.

Bargain buyers:

I want my coverage to be basic and cheap.

Loyalists:

I want to take care of myself, and my insurer helps me do that—it’s a win-win.

Overwhelmed:

I have a lot on my plate. I need my healthcare insurance to be easy.

I want quality healthcare coverage and my insurer to take an active role in my health. I prefer my em-ployer to make insurance decisions for me.

I am in the prime of life and tend to not worry about my health until I’m sick.

I want low-cost coverage, and I am willing to accept reduced benefits and/or restricted networks to get there.

I want great healthcare coverage, and I don’t mind paying for it. I’m not interested in changing my habits to save a few pennies.

I need to work with my health insurer often. Because of this, I value convenience and ease of doing business with my insurer above all else. I just want insurance that is easy to use and understand.

I do take risks with my health like smoking and not getting checkups. But if my employer is paying, and my insurance company looks out for me, why bother changing?

While I do value low costs, I don’t want to sacrifice quality—really, I want the best value for my money. That’s why I’m willing to take many actions that can help me reduce my costs without compromising care.

When dealing with my insurer, I don’t care much for online tools, self-service options, rewards or other features that insurers have introduced.

My healthcare insurer is different than the others, and they develop new and innovative capabilities that keep them ahead of the pack. I’m planning on sticking with my insurer, and am happy to recom-mend my plan to friends and family.

I don’t care about price nearly as much as simplicity; however, I do appreciate it if my insurer can help me understand how much my healthcare costs will be in advance.

I want an insurer I can trust to take care of me, but don’t know if I can trust their advice.

In my daily life, I’m heavily into digital, including mobile apps, texting and social media.

Basic coverage and a live person to talk to when I need assistance is all I really need from my insurer.

I feel like I have a pretty good grasp on the intricacies of the health insurance market, but I really value health support and guidance.

I call, click and visit my insurers often to deal with my pressing issues; however, I particularly value the convenience of a live interaction.

I don’t expect healthcare insurance to be easy, and I rarely take the initiative to shop around or switch insurers.

When I need to interact with my health insurer, I prefer to use self-service options and digital channels.

I’m not looking to change my habits to save additional money, and I don’t need my insurer taking an active role in my health.

I really feel it’s a hassle to switch insurers, and I value those companies that reward me for my loyalty.

All in all, I don’t interact with my insurer very often.

Understanding the different healthcare needs and attitudes of employees



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company. For these kinds of companies, attracting a continuous supply of qualified workers often takes precedence over retaining them for an extended period. So understanding whether or not healthcare is a relevant benefit to attracting workers to these industries is vitally important. Health insurance exchanges may be an attractive option, not just for the companies but for their employees as well, who can find their coverage more portable as they move from one employer to another. By contrast, companies in industries such as aerospace and defense might well continue to believe that their company’s performance hinges on retaining experienced, long-term employees. That is, not only the attraction of employees but also their retention may be important aspects of these companies’ talent strategies. Providing company-sponsored health insurance is more likely to remain part of the value proposition such a company offers its employees to attract and retain them, even in the wake of the Affordable Care Act. Companies with multiple business units, each of which may have slightly different workforce con-figurations, will need to ask similar industry-specific questions. In such a case, workforce preferences when it comes to health coverage are unlikely to be uniform across the different business units.

2. What are people’s needs across different locations?

Getting more specific about who needs what when it comes to healthcare options also applies to thinking about employees in different locations. Simply put:

Politics vary in the United States from state to state. That means that exactly how the law is interpreted and applied in one state’s health insurance exchange will not neces-sarily be the same in another state.

Some states may charge users of their exchange a fee to cover operational expenses, either directly or via a per-enrollee fee on insurers selling in the exchange. And some states will offer no exchange at all but will let the federal government operate it. These differences have obvious talent planning implications for companies operating in multiple states.

3. Who needs and wants what?

Many companies are still coming to terms with the changing nature of loyalty in today’s work-place—of employee to employer and vice versa. The new health-care benefits situation casts a particularly intense light on those changing loyalties.

Given the growing presence of Millennials in the average work-force, the portability offered by health insurance exchanges might actually be a selling point, as that generation is less likely than their predecessors to look for lifetime employment, at least in some industries. The rise of insurance exchanges will dramatically increase the number of individual-insured consumers and the options that are available to them. As a result, these workers may be less likely to make health benefits a deciding factor in their employment decisions.

A company that considers the different options and provides direction about healthcare service choices other than employer- sponsored health programs may

be able to attract and retain younger workers more effectively than one that ignores this need. In general, a key to success will be to understand workforce needs in light of the changing health-care environment.

Master segmentation and engagement

A critical step in understanding employee needs in the context of an industry or particular business is to get more detailed and granular in terms of the different healthcare and health insurance needs of different workforce segments.

The 2012 Accenture Healthcare Consumer Survey identified five different segments of the consumer population based on their needs, attitudes and behaviors in the healthcare area. For example, “bargain buyers” simply want coverage to be basic and cheap, even if it means reduced benefits. By contrast, “loyalists” want the highest-quality healthcare coverage, and they may be willing to pay more for it (see sidebar, opposite).

Understanding these segments is obviously important to insurers, who can use that insight to invest in targeted consumer acquisition and retention strategies and tailor forms and channels of service to the segments. Employers can also, however, tailor benefits, incentives, information tools and guidance to employees depending on those different segments—potentially improving employee engagement and retention.

Who will provide the guidance employees need to make the healthcare coverage decision right for them? Is that the job



of the insurers or the job of the exchanges? Both will indeed play such a role.

Yet much of the guidance offered by health insurance exchanges will be passive—often delivered via a self-service website where people can compare plans and determine whether they are eligible for subsidies. Live assistance will also be available through state- or federally-sponsored call centers. But it’s unlikely that even the best customer service representative from an exchange will have the talent interests of any particular employer in mind.

Another concern is how effectively insurers are engaging with consumers when it comes to their healthcare options. Employees are often unwilling to acquire new habits that could both improve their health and save them money. Yet few employers believe that the insurers themselves are doing enough to more deeply engage those employees.

If companies truly want to create more engaged employees and thereby secure a talent advantage during this time of change, they should take a more active role in providing information tailored to different segments of the workforce. With so many options available, it will not be a wise choice for an employer to say, “Here’s a voucher and here’s a link to the health insurance exchange. Good luck.”

By taking into account industry specifics, location and segmentation information, companies can improve employee engagement whatever their ultimate approach to healthcare coverage. Even if a company decides not to offer company-sponsored health

insurance, it can still strengthen its relationship with employees by making information about accessing and using the exchanges available to its workforce. In this way, the company will continue to serve as a benefits resource for its employees.

Manage the change

Beyond the tactical issues of assessment and counsel, the larger challenge for companies will be managing the complex portfolio of change factors and the overall journey across the new health benefits landscape. Because of the wide-ranging impacts of the Affordable Care Act on most companies’ existing operations, it will be more important than ever to manage the overlaps or touch-points between different initiatives and to manage the necessary interactions between relevant parts of the organization.

Managing the new benefits situation will require, for example, extensive interaction between the HR, finance and legal functions. It will also require the coordinated assessment, as discussed, of different employee needs across locations and business units.

Effective change management programs also address the need to manage employee expectations. “Change fatigue” can set in for a workforce buffeted by the demands made on them by successive changes thrown at them over an extended period of time.

The workforce needs to be able to assimilate the scope and depth of change at a very personal level. Decisions about health are hard enough for individuals; the

For further reading

“Reconciling the Great Healthcare Consumer Paradox: Are consumers willing to change to get what they want?” Accenture 2012: http://www.accenture.com/sitecollectiondocuments/Accenture-Reconciling-the-Great-Healthcare-Consumer-Paradox.pdf



81

stakes are even higher for employees with partners, children or other dependents.

Beyond these higher levels of strategic planning and management, several specific supporting activities will be critical to managing the effects of the changing health benefits situation on individual employees and the organization as a whole.

Communications and transparency.Communicating with employees is, in part, simply a legal requirement of the Affordable Care Act. However, companies seeking a talent advantage will, as discussed, provide robust and comprehensive communications as well as information tailored to the needs of individuals.

Effective communication is about more than just providing information, however. It’s also about establishing trust. That means that transparency will be vital.

One approach more companies are relying on uses social media platforms such as Facebook and Yammer to facilitate the sharing of questions and concerns and, more important, to quell false rumors and deliver accurate, consistent and timely information to employees almost instantaneously.

Training and change sponsorship.Effective training for HR staff as well as those working in call centers will be essential to answer the increased volume of questions coming from employees. Business managers will need to have a general level of knowledge about the changing healthcare environment, though not the same level required by the HR staff. Far more important: Business leaders need the training that can help them become more effective change managers and sponsors.

Companies should look for proven curriculums in the area of change management—including courses in developing and managing change plans; engaging stakeholders and building commitment to change; creating effective two-way communication programs; delivering cultural change; and transitioning to new ways of working.

Employers also need to consider what kind of organizational model they will use to deliver change expertise across the enterprise. For example, one model that is rapidly becoming a best practice is to establish a dedicated change management resource group within the company. This group can provide high-level strategic experience as well as specific expertise in such related areas as program management.

Technology and process change. Because of the need to facilitate interaction with a variety of state health insurance exchanges, companies will need to manage the related changes to benefits processes and then the technical implications for systems, applica-tions and networks. IT will need to adapt in a variety of areas, including enrollment, pricing, billing and customer service. These impacts on healthcare IT are certainly affecting payers, but all companies should be focused on how, for example, their enterprise systems are interoperating with health insurance exchanges.

There are many challenges ahead for employers and employees alike as the implications of the Affordable Care Act become clearer and as lessons are translated into best practices from an HR and talent perspective.

There will be more than a few stumbles along the way. But in the midst of the uncertainties, companies have an opportunity to achieve a talent advantage by understanding their employees’ healthcare preferences more accurately and then by providing the kind of counsel that leads to better engagement, productivity and retention.

Essential to achieving those benefits, however, will be anticipating and managing the effects of change on people, leadership and the entire organization—enabling a company and its people to adapt to and even embrace the possibilities of the years ahead.

About the authors

David Smith is the senior managing director responsible for the Accenture Talent & Organization group. He is based in Hartford, [email protected] Breck Marshall is the managing director responsible for Talent & Organization within Accenture’s Health & Public Service industry group. He is based in Washington, [email protected] J.P. Stephan is the managing director responsible for the Accenture Health Customer Relationship Management (CRM) group. He is based in Pittsburgh, [email protected] The authors would like to thank Tami Hale, a senior manager in the Accenture Health management consulting group, for her contributions to this article.

How Germany’s top companies thrive in rough timesBy Michael Brueckner, Peter Pfannes and Frank Riemensperger

The most successful German companies continuously transform themselves to increase and maintain overall competitiveness. And they owe this outstanding agility to a balanced combination of financial strength, IT-enabled insight and values-driven leadership.

Germany


Germany


When Accenture recently identified the top performers among Germa-ny’s 500 biggest companies— the third such study in as many years (see sidebar, page 88)—just 12 of the 25 leading companies had held on to their coveted status for three consecutive years. How did these growth champions manage to ride out the global recession so successfully?

Having previously looked at what characterizes top German companies, we knew that the best performers are exceptionally fast movers. They enter new markets more swiftly than their competitors, respond faster to business trends and rarely miss an opportunity to innovate—often by collaborating with customers and even competitors.

When we further analyzed in detail how the winning companies have managed to maintain their dominance—outstripping their peers in both growth and profit-ability—that agility turned out to be critical.

Continuous transformationIndeed, Germany’s growth cham-pions are masters of continuous transformation. At any given moment, they are ready to change course, responding to shifts in the economic outlook, market developments and their own fortunes with extraordinary speed.

By managing multiple product and technology lifecycles at the

same time, they compensate for weaknesses in one area by focusing on another—with innovative products tailored for new, as well as traditional, markets.

Witness, for example, how the Wolfsburg-based Volkswagen Group has reduced its dependency on the lifecycle of single models by steadily expanding its product range across all eight of its glob-al brands—VW, Audi, Bentley, Bugatti, Porsche, Lamborghini, SEAT and ŠKODA—and managing them in parallel, with different launch times in different markets. This mastery of several so-called S-curves simultaneously enables VW to serve new customer groups faster, and has helped sustain its remarkable compound annual revenue growth—9.2 percent on an average net profit margin of 4.0 percent between 2005 and 2011, compared with 6.5 percent and 2.1 percent, respectively, for its industry peers.*

Consider, too, how Voith, a Heidenheim-based industrial services and mechanical engineering company, has maintained year-on-year revenue increases thanks to a diversified portfolio approach that allows it to manage differing business cycles in its five core markets. The company compensates for declines in some markets by seizing growth opportunities in others, especially in such fast-growing emerging markets as China, India and Brazil.

* Three key aspects of business, so-called hidden S-curves—market relevance, distinctiveness of capabilities and talent development—mature and start to decline much faster than the overall financial performance of a company. High performers actively manage against these curves.

Maintaining high performance in today’s volatile markets isn’t easy—even for leading players in one of the world’s most powerful economies.

85


Plainly, flexibility of this order hinges on exceptionally agile and versatile corporate structures. We found that to help create and sustain those structures, the growth champions balance three key enablers.

1. Financial firepower

The growth champions are signifi-cantly more profitable than other big German companies. And they reinvest more of those profits than their peers, especially in R&D—a practice that helps explain why they are also such leading innovators. Between 2007 and 2011, for example, the growth champions invested an average of 4.0 percent of their revenues in R&D, versus an average of 3.7 percent for their peers.

In addition, they’ve managed to boost their profitability, even in years of crisis. As a group, their operating margin rose by 2 percent between 2009 and 2011, for example, compared with an increase of just 0.6 percent for their peers. Meanwhile, their capital retention ratio rose by 1 percent between 2007 and 2011, while that of their peers fell by 2 percent.

That, of course, helps explain how the top players managed not only to invest in the substance of their business—increasing their assets by 52 percent between 2007 and 2011, versus only 6 percent for their peers—but also to actually extend their lead in terms of profitability. Their net profit margin declined by just 13 percent in this critical period,

In 2006, when Linde paid €12 billion—more than six times that year’s operating profit—for UK-based BOC Group, some wondered if the German industrial gas and engineering company had overreached. They need not have worried.

By complementing Linde’s strengths in Europe with BOC’s extensive presence in the fast-growing Asian market for chemically synthesized gases used in steelmaking, oil refining, medical and other applications, the deal created the world’s largest supplier of such products—a global giant with annual sales of almost €12 billion.

The merger, moreover, promised to deliver significant financial advantages. Because the combined company could also cut selling and administrative expenses, as well as command better prices from its suppliers, it expected to be generating annual savings of €250 million within three years.

By then, of course, global markets would be in the grip of a severe downturn—the worst since the 1930s. Thanks,

however, to rigorous cost cutting in the years running up to the crisis, Linde boasted the financial firepower to maintain and even boost its profitability (see story).

Indeed, the company’s operating profit rose 22.6 percent between 2009 and 2010. Sales, too, were up, by 14.8 percent. And since 2009, Linde’s stock price has soared by more than 160 percent—fueled, in part, by an acquisition strategy that has continued to deliver opportunities for profitable growth.

Case in point: the 2012 purchase of US-based Lincare Holdings, a leading global provider of respiratory therapy equipment for homes (and which shares common roots with Linde, having started out as the German company’s Americas business more than 100 years ago). The acquisition could double Linde’s sales in North America—prompting CEO Wolfgang Reitzle to predict that the company will achieve its profit goal of €4 billion (versus €3.2 billion in 2011) by 2013, a year earlier than originally projected.

The Linde Group: Continuous transformation for competitive advantage

Germany


compared with fully twice that proportion for their peers.

Low levels of debt and high levels of liquidity are equally significant (see chart, opposite). On average, the growth champions had an equity-to-debt ratio of 1:1.7 while their peers’ ratio averaged 1:2.9. (The difference in liquidity was especially clear at the peak of the financial crisis.)

Thanks, for example, to a consistent strategy of using free cash f low for continuous debt reduction and a highly successful working capital management program, HeidelbergCement has not only weathered the storms of the recent past but is also securely positioned going forward. The company’s short-term liquidity is sufficient to cover loan repay-ments for the next two years. And with only 10 percent of its EBITDA in euros, it is well cushioned from diminishing demand in the Eurozone.

Leveraging all that financial firepower, the growth champions have been swift to seize opportu-nities, whenever they arise. Case in point: the Munich-based Linde Group, which in 2006 paid some €12 billion for the United Kingdom’s BOC Group and became the world’s largest supplier of gases used in industrial processes, with a market share of about 20 percent (see sidebar, page 85).

2. Near-perfect information

The growth champions analyze the risks and opportunities of entering new markets much more consistently and system-atically than their peers. And they are able to do so because

they have access to better business intelligence.

Because of early adoption of state-of-the-art IT—and especially business intelligence and analytics software—top players can measure the most relevant performance indicators online, in real time. Furthermore, their employees have ready access to granular information about customers and suppliers because they have invested in technologies that facilitate collaboration and the swift exchange of information.

For the growth champions, indeed, IT is a strategic asset. And they invest in it continuously. Consider, for example, how one German healthcare company has invested in centralized databases, open source business intelligence solutions and other leading IT capabilities to improve the quality, security and accessibility of its data.

3. Values-driven leadership

Germany’s top players manage their companies for the long term. A couple of quarters of poor financial performance are not typically grounds for dismissing the CEO. Our research shows that the chief executives of growth champions enjoyed an average tenure of 7.6 years over the last two business cycles, compared with 6.7 years for their peers. And when we looked at the longest CEO tenures, the gap widened significantly—to an average of 18.5 years for the growth champions, versus 10.5 years for the others.

Top German companies also benefit from a particularly close collaboration with their workforce. Indeed, they seem to have been


87

Non-growth champions

Growth champions

2

3

4

5%

R&D intensity (R&D/Revenue), 2007–2011, %

2

3

4

5

6

78%

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Balance German growth champions balance operating excellence with innovation intensity on a consistently higher level.

Operating margin (EBIT/Revenue), 2007–2011, %

2007 2008 2009 2010 2011

2.9 2.42.9

3.3

2.80.9

1.7 1.6

1.81.9

1.70.3


Growth champions

Leverage and liquidity German growth champions show a consistently lower leverage ratio, even in times of crisis . . .

Leverage ratio (Debt/Equity), 2007–2011

Source: Accenture research based on Top 500 Germany, 2013

2007 2008 2009 2010 2011

1.58

1.681.71

1.591.62

0.18

1.50

1.58

1.53

1.47

1.52

0.100.08

. . . and have a higher liquidity ratio.

Liquidity ratio (Current assets/Short-term liabilities), 2007–2011

0

30

60

90

120

150%

2007 2011 2007 2011

0

60

80

100%

40

20

2007 2011 2007 2011

Note: Capital turnover = Revenue/Total assets

Capital retention rate, 2007–2011

Capital turnover and capital retention rate German growth champions use their capital cautiously—with significantly lower capital turnover than their peers—and do a better job retaining capital.

Capital turnover, 2007–2011


Growth champions104139

96132

64 555765

7.5

7.0

4.7

6.7 6.7

3.1 3.2

2.1

3.32.7

3.53.7

4.1

3.6 3.6

4.03.8

4.34.0

3.8

Germany


especially adept at leveraging the benefits of a long tradition of corporate governance that seeks to minimize industrial strife by incorporating employees in decision making through board representation and so-called works councils.

Management’s strong emphasis on shared values—the growth champions’ business reports and Internet homepages resonate with such collaborative notions as “integrity” and “motivation and performance”—has clearly

strengthened their employees’ sense of belonging to the company and their commitment to its long-term success.

Relatively high levels of staff satisfaction have also served the growth champions well in volatile markets, allowing them to imple-ment workforce adjustments more easily than their peers.

The Semiconductor Manufacturing Technology (SMT) division of the Oberkochen-based optical systems

For further reading

“IT and the strategic growth agenda,” Outlook 2012, No. 1: http://www.accenture.com/us-en/ outlook/Pages/outlook-journal-2012- information-technology-strategic-growth-initiative.aspx

“Strategy at the edge,” Outlook 2011, No. 2: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2011-strategy-at-the-edge.aspx

“Jumping the S-Curve: How to sustain long-term performance,” Outlook 2011, No. 1: http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2011-sustain-long-term-performance.aspx

“Mind the gap: Insights from Accenture’s third global IT performance research study,” Accenture 2010

“Growth Studies Top 500/100 — Sustaining high performance through continuous transformation,” Accenture 2013: http://www.accenture.de/growth


In collaboration with Die Welt, one of Germany’s leading newspapers, Accenture has been analyzing the country’s 500 largest companies—those posting annual sales of at least €1 billion—since 2010. Our goal: to identify those that have managed to outperform the average growth of their peers, both within their industry and overall.

The first two such studies sought to identify the distinguishing characteristics of these growth champions and pinpoint where they are focusing their energies for future growth. The third, which is the basis of this article, set out to discover just how such companies secure and maintain their dominance.

We wanted our analysis to include cycles of both economic recession and recovery—to ensure that we were identifying the very best performers, those that prosper despite market volatility. And we were especially interested to learn the secrets of success for the 12 companies among this year’s Top 25 that consistently have managed to maintain their place at the top—through all three periods, which included the Great Recession.

The base year for all three studies was 2005. But because we were particularly interested in capturing the effects of the most recent cycle in this year’s study, we focused on the period from 2007 to 2011, adjusting in rare instances to 2008.

We measured the peer group’s performance across dozens of variables, employing a process of elimination to isolate the most significant ones. These ranged from financial measures such as ROS, ROE and foreign direct investment to how successfully new technologies are implemented, for which we leveraged the criteria employed in the Accenture High Performance IT Study. We also examined less tangible considerations like corporate values and strategic objectives and their impact on how the company is managed.

About the research


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maker Carl Zeiss, for example, has been able to introduce flexible working arrangements throughout the group with the cooperation of labor representatives. SMT’s employees, like those of other growth champions, have been willing to be flexible around such issues as pay and conditions because they know that their long-term job prospects are relatively secure. Even in 2009, at the trough of the recession, leading companies had an employee turnover of just 4.1 percent of their employees, while the rest of the peer group had a turnover of 7.8 percent.

Germany’s top companies have recognized that managing with an emphasis on values helps build a strong, cohesive culture—a culture that creates continuity and enables the agility that so dramatically distinguishes them from their peers. Coupled with financial fire-power and access to near-perfect information, that continuity has given them the strength to succeed in unprecedentedly volatile market conditions—and promises to sustain them into an uncertain future.

About the authors

Michael Brueckner leads Accenture Management Consulting in Austria, Switzerland and Germany. He is based in [email protected]

Peter Pfannes is a Berlin-based senior manager with Accenture’s Health & Public Service industry [email protected] Frank Riemensperger, Accenture’s country managing director for Germany, is the company’s geographic lead for Austria, Switzerland and Germany. He is based in [email protected]

The authors would like to thank Matthias Wahrendorff, a Munich-based senior manager at Accenture Research, for his contribution to the study.


The following companies and organizations are referenced in this issue.

Company Index

Accenture . . . . . . . . . . . . . . . . . . . . 31, 32, 33

Activision Blizzard . . . . . . . . . . . . . . . . . . 22

Amazon . . . . . . . . . . . . . . . 30, 32, 51, 55, 60

Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Australia Post . . . . . . . . . . . . . . . . . . . . 29–30

BB&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Bank of China . . . . . . . . . . . . . . . . . . . . . . 36

Bechtel Corp . . . . . . . . . . . . . . . . . . . . . . . . 32

Belkin International . . . . . . . . . . . . . . . 53–54

Biogen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Blizzard Entertainment . . . . . . . . . . . . . . . 22

BlueScope Steel . . . . . . . . . . . . . . . . . . . . . 29

BOC Group . . . . . . . . . . . . . . . . . . . . . . 85, 86

Carl Zeiss . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Cargill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

China Mobile Communications Corp . . . . . 37

Corning . . . . . . . . . . . . . . . . . . . . . . . . . 62, 63

Daewoo Commercial Vehicle Co . . . . . . . . . 43

DeKalb Genetics Corp . . . . . . . . . . . . . . . . . 59

Dell . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 58

DuPont . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

eBay . . . . . . . . . . . . . . . . . . . . . . . . . . . 24–25

Eileo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Embanet-Compass . . . . . . . . . . . . . . . . . . . 24

Facebook . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Fast Retailing Co . . . . . . . . . . . . . . . . . . 42–43

Financial Times Group . . . . . . . . . . . . . . . . 24

Flexicar . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Ford Motor Co . . . . . . . . . . . . . . . . . . . . . . . 31

Fortis Healthcare . . . . . . . . . . . . . . . . . . . . 43

Fujifilm Corp . . . . . . . . . . . . . . . . . . . . . . . . 54

Genentech . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Google . . . . . . . . . . . . . . . . . . . . . .30, 32, 48

HeidelbergCement . . . . . . . . . . . . . . . . . . . 86

Hertz . . . . . . . . . . . . . . . . . . . . . . . . . . . 22–23

HTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Huawei Technologies Co . . . . . . . . . . . . . . 37

Hyundai . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

ICICI Bank . . . . . . . . . . . . . . . . . . . . . .40, 42

Intel Capital . . . . . . . . . . . . . . . . . . . . . . . . 61

Kia Motors Corp . . . . . . . . . . . . . . . . . . . . . 37

Klabin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Kodak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

LG Electronics . . . . . . . . . . . . . . . . . . . 37, 44

Lincare Holdings . . . . . . . . . . . . . . . . . . . . 85

Linde Group, The . . . . . . . . . . . . . . . . . 85, 86

Millennium Pharmaceuticals . . . . . . . . . . 36

MIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Monsanto Co . . . . . . . . . . . . . . . . . . 59, 61–62

Multilab . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Novartis Venture Funds . . . . . . . . . . . . . . . 61

Nycomed . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Olam International . . . . . . . . . . . . . . . .44, 45

Partido Acción Nacional (Mexico) . . . . . . . . 5

PayPal . . . . . . . . . . . . . . . . . . . . . . . . . . 24–25

Pearson . . . . . . . . . . . . . . . . . . . . . . . . . 23–24

PEMEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Penguin India . . . . . . . . . . . . . . . . . . . . . . . 24

Salesforce .com . . . . . . . . . . . . . . . . . . .60, 63

Samsung . . . . . . . . . . . . . . . 36, 37, 40, 42, 45

Semiconductor Manufacturing Technology . . . . . . . . . 88–89

Sharp Corp . . . . . . . . . . . . . . . . . . . . . . . . . 50

Stanford University . . . . . . . . . . . . . . . . . . 76

State Bank of India . . . . . . . . . . . . . . . . . . 37

State Street Corp . . . . . . . . . . . . . . . 29, 31–32

StubHub . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Suzano Papel e Celulose . . . . . . . . . . . . . . 25

Takeda Pharmaceutical Co . . . .36, 40, 42, 45

Tata Motors . . . . . . . . . . . . . . . . . . . 36, 43, 45

TCL Corp . . . . . . . . . . . . . . . . . . . . . . . . . . 40

UNEP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

United Nations . . . . . . . . . . . . . . . . . . . . . . . 8

Vivendi . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Voith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Volkswagen Group . . . . . . . . . . . . . . . . . . . 84

Weather Channel, The . . . . . . . . . . . . . . . . 53

Western Union . . . . . . . . . . . . . . . . . . . . . . 31

Wilmar International . . . . . . . . . . . . . . . . . 37

Woodfield Mall (US) . . . . . . . . . . . . . . . . . 16

YouTube . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Zipcar . . . . . . . . . . . . . . . . . . . . . . . . . . 22–23

accenture - outlook journal q2: a new path to growth - june 2013

Business

group of companies

trademarks of accenture

biggest companies

borderless companies

engines of global growth

successful german companies

tomorrows growth engines

different groups of