Reshaping Your Company Business Model : Building for the Future During the Downturn

Perspective
Paolo Pigorini
Vinay Couto
Ariel Fleichman
Carlos Gondim
Reshaping Your
Company Business
Model
Building for the Future
During the Downturn

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Contact Information:
Buenos Aires
Ariel Fleichman
Principal
+54-11-4131-0413
ariel.fleichman@booz.com
Chicago
Vinay Couto
Partner
+1-312-578-4624
vinay.couto@booz.com
Rio de Janeiro
Paolo Pigorini
Partner
+55-21-2237-8409
paolo.pigorini@booz.com
São Paulo
Carlos Gondim
Senior Associate
+55-11-5501-6371
carlos.gondim@booz.com
Booz & Company

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There is widespread recognition that the typical corporate
EXECUTIVE
cost-cutting initiatives will not suffice in the current business
SUMMARY
environment. To navigate the global downturn and even
prosper in the process, corporate leaders must take a step back
and consider how best to implement long-lasting and effective
initiatives aimed at fundamentally improving the way their
companies operate. Booz & Company’s approach focuses on
three strategic questions: What do we do? How do we do it,
and where? How well do we do it? Our experience shows that
companies too often neglect the relevant issues related to their
business model (“How do we do it?”). Focused efforts in this
area can result in structural improvements in efficiency and
effectiveness.
This Perspective explores the commonly observed issues and
derailers surrounding companies’ business models in light of
important questions they currently face: Have we built into
our operation the flexibility and resilience necessary to survive
this crisis? Is our business model appropriate for navigating
and succeeding in this global downturn?

Booz & Company
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THE NEW CEO
After a period of intense growth
than it did only a few months ago.
AGENDA
across almost all sectors and
Current trends in major economic
regions, the global downturn has
variables suggest that difficult times
rapidly shifted CEOs’ agendas from
are ahead, at least in the coming
strategies for growth to how to
months. Companies are already
improve performance and tighten
facing lower demand and are having
cost controls. Though the crisis
increasing difficulty in finding capital.
started in the U.S. financial industry,
it has quickly spread to virtually
The time has come to clean house.
all industries and geographies.
As a rule, when demand is increasing
All over the world, companies are
rapidly, as it was in recent years,
postponing or canceling investment
companies must move fast to stay
plans, reviewing their operating
ahead of their competitors, which
targets, reducing and sometimes even
often leads to decisions being made
temporarily suspending production,
and implemented without a thorough
announcing job cuts, terminating or
analysis of the structural impact on
reviewing contracts, implementing
the organizational model. A typical
cost-cutting efforts, selling or thinking outcome is the addition of people
about selling assets, and more.
and positions without the benefit of
a holistic view of the consequences.
This sudden change poses a new
When the growth frenzy settles,
challenge for CEOs, who find they
companies should take a step back
must quickly readjust their mind-sets
and reevaluate the way they work.
for a future that looks very different
“Expanded restructuring actions are required
to protect UTC profitability and are expected
to position the company for resumed earnings
growth in 2010.”
— Louis Chenevert, CEO of United Technologies Corp.
(March 2009)
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Booz & Company

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In a recession, softening demand
eventually come back once the initial
and review the way they operate. It
generally makes it difficult to
focus is lost.
is time to seek short-term savings
deliver results by relying simply on
while building the foundations for
revenue. Profitability is defended by
The current economic crisis demands
another growth period in the future.
increasing the focus on cost control
deeper reflection. The effects of this
It is dangerous indeed to merely stand
and operating efficiency. However,
downturn are expected to last for
in the wings as a passive spectator,
while most companies are quick to
quite some time, so companies should
as this could create disadvantages
start cutting costs, we argue that the
consider long-lasting initiatives,
vis-à-vis the competition or lead to
outcome of most of these efforts—
rather than temporary cost-cutting
increasing pressure from shareholders,
which may be necessary—tends to
efforts. True transformational cost
analysts, or creditors. In other words,
be marginal and short-lived. Despite
reduction opportunities need to break
it is imperative that companies use
the immediate results, cost reductions
ingrained structures and behaviors
the downturn to seize the future with
generally do not structurally change
throughout the company. Moreover,
their own hands, before a top-down
the way the company works, or how
the downturn creates a window of
mandate is imposed.
its executives think, so those costs
opportunity for companies to rethink
“As a consequence of the unprecedented crisis
affecting the global economy, which also affects the air
transportation industry, it has become inevitable for
Embraer to implement a revision to its cost structure
and workforce.”
— Embraer statement announcing a 20% reduction in
production and administrative personnel (February 2009)
Booz & Company
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Booz & Company’s approach goes
organizational model and in-house
levers mentioned earlier, companies
beyond traditional cost-cutting
versus outsourcing (make or
tend to neglect relevant issues related
efforts, focusing on a set of three
buy) choices.
to their business model (“How do we
strategic questions (see Exhibit 1).
do it?”). Focused efforts in this area
How well do we do it? Performance
can result in structural improvements
What do we do? A strategic review of
assessments, identification of
in efficiency and effectiveness.
the company’s portfolio of products
opportunities, and implementation of
and services, as well as the markets
operational improvement initiatives.
The remainder of this Perspective
and customers targeted.
focuses on issues surrounding
While the first question is addressed
the company Business Models by
How do we do it, and where?
in yearly strategic planning processes,
describing our view of these issues
An assessment and rethinking
and the third has to do with the
and commonly observed derailers.
of the company’s business and
tactical performance improvement
Exhibit 1
Companies’ Typical Performance Levers – Key Strategic Questions
- Portfolio analysis
What do
- Products & services rationalization
we do?
Market,
Customer,
- Analyzis of customer segments & cost-to-serve
Products
& Services
- Redefinition of the business & organizational models
- Refocusing the corporate center
- Redefining the business units & their accountability
How do we do
Business Model
- Back-office consolidation & outsourcing
it, and where?
& Organization
- Development of shared services
- Manual vs. automated processes
- Process redesign
- Procurement optimization
- Aligning service levels and costs
How well
do we do it?
Policies, Processes
& Technology
Source: Booz & Company
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Booz & Company

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BUSINESS MODEl The activities performed in a business client-driven functions that support
STRUCTURE
organization can be split into three
the business units and the corporate
blocks, or elements, according to
center. Establishing an efficient
their nature and their role in deliver-
and effective support area requires
ing results. Typically, the Corporate
a clear definition of its operating
Center performs activities related to
model. Traditionally, these areas
strategic leadership, Business Units
can be centralized at the corporate
house functions focused on the
headquarters or decentralized
product or customer value creation,
to provide each business with a
and Support Services provide internal
significant level of autonomy. In
client-driven services and manage out-
most cases, support areas can be
sourcing relationships (see Exhibit 2).
consolidated in a shared services
center, a model that defines new
1. Corporate center. The corporate
relationships between internal clients
center holds the functions that
and service providers.
provide strategic and financial
guidance for the company. Its key role 3b. Outsourced services.
is to fulfill five fundamental missions:
Outsourcing services is another
provide strategic leadership, control
relevant theme for companies,
and monitor results, develop and
especially during downturns, when
promote a corporate identity, gain
a reduction in costs is necessary.
access to and allocate capital, and
Outsourcing can be extremely
ensure that the required capabilities
efficient and effective, but it must be
and talent are available.
carefully planned and executed. Many
executives believe that outsourcing
2. Business units. These areas are
is an easy move to cut costs by
responsible for activities directly
reducing the activities currently
related to providing services and
executed in-house, benefiting from the
products to customers and are
outsourcer’s economies of scale and
usually structured into units that are
its focus on core functions. A classic
accountable for results.
mistake is outsourcing to “make the
problems go away.” But evidence
3. Support services. Support areas are
shows that most of the promised
focused on providing cost-effective
benefits are not captured.
Exhibit 2
Business Model Structure
- Provides strategic leadership
- Exercises control
- Defines the corporate identity
- Manages access to capital
1
and its allocation
Corporate
- Builds/strengthens key
- Focus on customer
Center
capabilities
value creation
- Improve operating
effectiveness
Strategic
Corporate
- Provide cost-effective
- Manage the
Guidance
Policy
client-driven services
product/technology
Results/
portfolio
Service
- Manage outsourcing
Accountability
relationships
- Develop talent
2
3
3b
Business
Service
Support
Service
Outsourced
Units
Services
Services
Request
Manage
Source: Booz & Company
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TYPICAl
BUSINESS MODEl
DERAIlERS
We would argue that the main goal
for corporate leaders, especially
during times of high uncertainty and
expected downturn, is to develop a
robust business model with flexible
and accountable operations, efficient
and agile support functions, and
a lean corporate center focused
on setting the strategic guidelines
Kick-Starting a Business Model Diagnostic
while controlling the results through
an appropriate set of indicators.
Booz & Company has developed a methodology for reviewing issues related to
However, in many companies, the
the business model that allows for a precise diagnostic and enables focused
roles and responsibilities of each
efforts on a company’s critical issues. In addition, our methodology entails the
element of the business model
identification and implementation of quick wins early in the effort in order to
(corporate center, business units,
maximize the needed savings and fund the rest of the program.
support services, and outsourced
Although every company has its own realities, a set of key questions helps to
services) and the interfaces between
kick-start the diagnostic (see Exhibit A).
them are not clearly defined, which
leads to duplicated or misaligned
activities, unclear strategic guidance,
and ultimately poor performance.
We find that many companies face
difficulties in their operations that
can be directly traced to this lack of
clarity. The downturn merely makes
Exhibit A
these problems more apparent.
Key Questions on Business Model
Improving the business model starts
with a precise diagnostic of each
element, and follows with targeted
- What roles should the corporate center play?
Corporate
quick wins that will produce savings
- Given these roles, what is the best organizational structure?
Center
- What should be the decision rights of the corporate center and the business units?
that can then fund the remaining
restructuring that needs to take place
- What is the best way to organize the business units?
(see “Kick-Starting a Business Model
Business
- How can we align business units with the company’s strategy?
Units
Diagnostic”).
- How should we push accountability and how can the business units be held accountable?
- Which services should be centralized vs. decentralized?
- How can we ensure that support functions provide the right level of service for the business?
Support
- Is shared services the most adequate construct? If so, for what functions? How should
Services
shared services be governed?
- Which services should be outsourced? What are the expected savings/effectiveness gains?
- How can we ensure the appropriate management of outsourced services and vendor relations?
- How many people do we need to perform the activities?
Overarching - How many and what work levels should there be in the organization?
Topics
- What is the adequate number of layers and spans of control?
- What are the gaps in skills and qualifications?
Source: Booz & Company
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Booz & Company

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Building a More Effective
shareholder returns (as measured by
a corporate staff that supports rather
Corporate Center
stock price growth).
than “audits” the business units.
Large corporate centers have
This calls into question the single-
Unfortunately, most companies are
earned their bad reputations, so it
minded devotion to cutting costs in the not strong execution companies.
is little wonder that they are often
corporate core. If big is not necessarily
Not surprisingly, the corporate staff
the first target of many corporate
bad, what constitutes good?
in companies with weak execution
restructurings. Years of bureaucratic
tends to “audit” more than support
“Big Brother behavior,” glacial
First, companies need to recognize
the business units, resulting in
decision making, and opaque
that the optimal size of the
unnecessary bureaucracy, hindering
overhead allocations have not won
corporate center is not simply a
decision making and adding cost.
corporate headquarters many allies
function of efficiency, but also one
among the P&L-bearing business
of effectiveness. Corporate centers
It’s a bit of a chicken-and-egg
units and newly streamlined support
must strike the right balance. But
dilemma. Does the deadweight of
functions. Consequently, in recent
how do you assess the effectiveness
the corporate core contribute to a
years the best practice in sizing the
of the corporate core? Over the past
weak performance culture, or does
corporate core has been to shrink it
few years, Booz & Company has
a weak performance culture disable
and cut its costs.
collected more than 50,000 individual the corporate core? Regardless of the
responses from around the world and
answer, we believe that half the battle
The irony is that there is no evidence
created an organizational diagnostic
is in setting explicitly clear roles and
that streamlining the corporate core
tool that we have posted online.
expectations for the corporate core.
contributes much incremental value to According to our findings, companies
a company. In fact, our analyses show
with strong execution (those that
Ultimately, the right size of the
no correlation between the efficiency
quickly translate important strategic
corporate core is a function of the
of the core (as measured by the size
and operational decisions into action)
role the company expects it to play,
of its staff relative to revenues) and
are significantly more likely to have
whether it is (1) governance guardian,
(2) advantage accelerator, or (3) scale
economizer (see Exhibit 3).
Exhibit 3
Corporate Core Roles
Governance Guardian
Advantage Accelerator
Role
Role
- Discharge legal, regulatory, and fiduciary responsibilities
- Leverage capabilities to deliver value above what individual
to protect shareholders and employees
portfolio businesses could generate autonomously
Typical functions
Typical functions
- Corporate strategy
- Manufacturing excellence
- Reporting
- Investor and government relations
- M&A/new ventures
- Lean six sigma
- Legal
- Audit
- R&D
- Corporate marketing
- Tax
- Compliance
- Org development
- Treasury
Common challenges
Common challenges
- Corporate functions become risk-averse and
- Metrics on value creation are
over-controlling
difficult to establish and measure
Scale Economizer
- Governance requirements are used as
- Cultural barriers inhibit top-down
an excuse for budget increases
Role
building of horizontal capability
- Harness scale company-wide to maximize cost efficiency
synergies
in non-market-facing activities
Typical functions
- IT
- Compensation and benefits
- Purchasing
- HR payroll and admin
- Accounting operations
- Facilities
Common challenges
- Centralized functions are unresponsive to business needs; shadow staffs emerge in the businesses
- Scale is suboptimized because tough decisions on standardization never get made
Source: Booz & Company
Booz & Company
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Governance guardian. There
Not surprisingly, the advantage
the functions that are sensitive
is no opting out of this role,
accelerator role is the most
to economies of scale, scope, and
which encompasses all the legal,
challenging of the three. To be
specialization (IT, purchasing,
compliance, and finance activities
effective, the corporate core must
accounting, facilities, payroll), and
needed to abide by corporate
not only add value to the business
you will have a good sense of what
governance standards and regulatory
units but add more value than the
overhead encompasses. It cannot
requirements. Although the added
businesses could generate on their
be eliminated, but it certainly can
value contributed is limited, this
own—and more value than any other
be optimized, and that is the third
role is not a significant drain on
corporate parent could provide. It
role of the corporate core: the
resources either, as economies of scale
must focus on capabilities that are
creation of common processes,
are easily leveraged and head count
truly differentiating: those where the
standards, and consolidated pools
needs are low. In our experience, a
company must be the best to win and
of expertise. More often than not,
company of about 10,000 employees
where it has the skills to be the best.
this takes the form of shared-service
can comfortably handle governance
operations, either housed in corporate
activities with a staff of about 30.
Take a look at the Global Fortune
headquarters and reporting to a
500 today, and you will see every
corporate functional head such as the
Advantage accelerator. This is where
variation on the advantage accelerator CIO, CFO, or CHRO; established
the corporate core makes the leap
theme. Procter & Gamble and 3M,
as organizationally distinct centers
from “auditing” the business units
for example, have invested heavily in
under a shared-services leader; or
to releasing the value trapped within
corporate R&D and have enjoyed big
outsourced/offshored. The corporate
and between them. In the advantage
new-product payoffs as a result. Dow
core is still ultimately responsible
accelerator role, the core can create
Chemical and General Electric, on the
for optimizing the efficiency and
considerable incremental wealth if it
other hand, have focused on building
effectiveness of certain back-office or
does its job right.
a strong multi-business manufacturing overhead functions, which is its most
function to encourage manufacturing
critical role.
The advantage accelerator
excellence at the individual business
concentrates on the sources of
unit level, as well as across businesses. The most common derailer related
competitive advantage identified in a
BP has pushed hard to create a
to the corporate center, therefore,
company’s strategy, whether they are
high-performance HR culture in its
is not size but the lack of a clear
innovation, leadership development,
corporate core, which oversees the
definition or dissemination of its role.
consumer marketing, manufacturing
setting of stretch targets and personal
This, in turn, leads to a number of
excellence, or any other critical
performance contracts.
other symptoms such as inadequate
capabilities. By allocating resources to
capabilities, excessive number of
the development and sharing of these
Scale economizer. Beyond observing
highly paid executives second-
winning capabilities, the corporate
minimum fiduciary obligations and
guessing the business unit heads,
core makes explicit choices about
cultivating strategic competitive
and lots of questions about value
where an advantage matters most in a
advantages, the corporate core is
addition.
company’s market.
basically overhead. Think of all
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