How IA Can Reduce Costs

8/2/2019 How IA Can Reduce Costs

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How the internal auditfunction can play a key rolein cost reduction efforts

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any organizations focus their cost reductionefforts around the numbers. This is the reasonwhy cost reduction initiatives are regarded asthe sole domain of the nancial community.Cost cutting is often no more than a review ofthe budget, the introduction of a saving againsteach line item, and then monitoring actual

versus planned spend. There is no problem with this approachif it is short-term cuts that are wanted. It is easy to reduce costsby a small amount on each line item by delaying expenditureinto a future period. However, these are not real savings and theorganization loses the opportunity to review underlying businesspractices during dif cult economic periods that have the potentialto create sustainable cost savings. Once the pressure is off, theseso called cost savings quickly come back into the budgets andmanagement are none the wiser. This is the tactical response tocost cutting. It can be done and it does have bene ts but these aremainly short term in nature.

On the other hand, organizations that approach their costreduction efforts in a strategic manner have the opportunityto signi cantly strengthen their competitive position from acost perspective rather than just survive the current economicdownturn. Activity-based cost reduction is a strategic responseto cost cutting that provides sustainable bene ts. This means thefocus shifts from the individual line items on the income statementor balance sheet toward the underlying activities that drive theexpenditure. Once these underlying activities are understood, itis relatively easy to identify and prioritize improvements that willhave a larger and longer-term impact on the business.


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Author

Viv Oates is leader ofthe Advisory Practice atErnst & Young, South Af

Cost cutting is much morethan just the elimination of

expenses from a budget.

How internal audit can helpcost reduction efforts


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The value that can be achieved by the inclusion of the internalaudit function is immense, as it can support a number of strategicobjectives, including the following:

1. Achieving buy-in to the cost reduction program from a broadergroup of stakeholders.

2. Improving visibility at management, executive and board levels

by ensuring internal audit reports include commentary on thecost cutting initiatives.

3. Identifying the risks and implications of costreduction initiatives.

4. Providing valuable input and insight into the key processes andactivities that drive certain costs.

5. Identifying critical improvement drivers to keep the businessfocused on priority areas.

6. Bringing a process and control capability to theoverall program.

7. Monitoring and evaluating key performance indicators on acontinuous basis.

8. Developing regular reviews as part of the annual internal auditplan to support sustainability.

9. Providing an objective viewpoint on the proposed initiativesprior to, during and after the introduction of the costcutting program.

10. Reporting on the bene ts realized by the program.

The biggest risk for any major initiative isthe ability of the organization to sustain thebene ts. In a survey of 115 multinationalstaken from the Financial Times StockExchanges top 350 companies, it wasfound that 70% could not sustain thebene ts of their cost reduction effortsbeyond two years. Often this is due to thefact that the changes introduced are notcontinuously re-inforced through regular,visible reporting of the key measures thatdetermined success in the beginning. Theorganization loses sight of those aspectsthat were considered essential when theprogram was rst introduced. This is wherethe internal audit function can play asigni cant role.

The internal audit function should be anintegral part of any strategic cost reductionprogram because it can ensure theredesigned business processes, activitiesand structures (if any) remain responsiveto the risks, and are embedded in thebusiness methods and practices.


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Working through this approach in ameticulous way, organizations are more

likely to achieve substantial bene ts overthe longer term by identifying signi cant

improvement areas.

As an example, overtime cost wasconsidered to be excessive in one verylarge organization. Certain employeeswere actually earning more by way ofovertime pay than from their regularsalaries. Management decided to cutthis cost, especially as dif cult economiccircumstances were resulting in lowerbusiness activity levels. As a result ofthe increased focus on overtime paytogether with more regular reporting,the cost began to show a reducing trend.However, as often happens, the momentthe emphasis changed to other signi canareas and the level of scrutiny reduced,the cost of overtime began to increase.This example highlights the need for muchmore effort in understanding and changingthe underlying reasons for a particular

cost rather than simply focusing on thecost itself.



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A more strategic andsustained approach isrecommendedFor example, travel expenditure may beunder review and the nance managermight request a saving of 20% in thefollowing years budget. One approachwould simply be to cut the number oftrips by an average of 20%, and the targetwould be achieved with no dif culty.Except during the following year, when thepressure is off, the costs will creep back

into the system and the bene ts of thesaving will be short lived.

An alternative approach, in addition to theabove action (which is a very good startingpoint), would be to review and redesignthe underlying activities that drive travelexpenditure in order to change the waythe organization operates. This would havethe effect of sustaining the saving over amuch longer term and ultimately gain theorganization competitive advantage.


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The following questions in relation to travel expenses should alsobe asked:

1. What is the breakdown of the travel expense? (In orderto understand the makeup of the cost and where to focusimprovement efforts)

2. What activities are performed that result in these costsbeing incurred?

3. Why do these activities need to be performed and do they addvalue to the business? And how can the bene t or value of theactivity be determined?

4. What are the interdependencies and risks of changing

these activities?5. Is there a better way to achieve the same or even a better

result, e.g., scenario or option planning?

6. What should the targeted cost be, taking into accountpotential improvements?

7. What needs to be done to redesign the approach to travel toenhance the process and reduce the cost?

8. What controls or performance measures need to be introducedto ensure sustainable success?

9. How will the performance of the activities be reported to

ensure that the costs dont creep back into the system?10. Who will sponsor the change program?

Organizations that approach their costreduction efforts in a strategic manner

have the opportunity to signi cantlystrengthen their competitive position.



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This simple example demonstrates how cost cutting is muchmore than just the elimination of expenses from a budget. It is astrategic adjustment that may well have a material impact on howan organization does business. Working through this approachin a meticulous way, organizations are more likely to achievesubstantial bene ts over the longer term by identifying signi cantimprovement areas. After an exercise similar to that describedis performed, it is possible to prepare a much more informedbudget for the next period, which will recognize the embeddedsavings derived. All too often budgets are simply a derivative ofthe previous period plus an adjustment for perceived economicand market changes. In fact, it is recommended that three-yearrolling budgets be introduced, showing the expenditure trendsand the bene ts derived from any cost saving initiatives over alonger term.

Unfortunately, many organizations leave the cost reductionprogram in the hands of the nancial community which also hasmany other priorities. This results in a number of quick wins andshort-term bene ts but often fails to achieve the longer-termsustainable impact that could make a strategic difference tothe entity.

Organizations that view cost reduction initiatives as a strategicimperative that could potentially result in a competitive advantage,and that approach the overall effort in an inclusive and methodicalmanner, will be much stronger when the economic cycle turns.No one yet knows who will survive, who will thrive, and whowill disappear during the current downturn only time will tell.Nonetheless, those organizations that approach cost reductionwith the right mindset have a better chance of success than those

which simply tamper on the periphery.

The value that canbe achieved bythe inclusion of

the internal auditfunction is immense.


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Number of yes responses: eight or moreWell done. Although there are no guarantees, you have agood chance of achieving real sustainable bene ts, whichcould result in competitive advantage.

Number of yes responses: six to sevenYour cost reduction effort is underway and has a chanceof success with the right adjustments introduced soonerrather than later. Ask for some help if you need it, and dontbe scared to review the program independently to identifyfurther areas for improvement.

Number of yes responses: four to veYou have probably decided to go for the short-term, quick xes and not to worry about the longer-term bene ts. If youbelieve in the potential for longer-term sustainable bene ts,you need help. You will probably want some external supportto quickly ramp up your program to the required level.

Number of yes responses: three or lessYou are not really that interested in driving cost reductioninitiatives and are probably staying in the peripherary of realand effective change. You will get some basic bene ts butnothing of any substance. Hope you are still around in veyears time!

Score your organization on the following yes/no questionsto determine the likelihood of sustainable success in your costreduction initiatives:

1. The cost reduction effort is driven as a key initiative sponsoredby the CEO.

2. An inclusive cost reduction steering committee has beenappointed to oversee the implementation of the program.

3. External consultants have been appointed to support theteam in establishing a standard methodology and appropriatebenchmarks and targets, and in setting up an appropriateprogram management approach to ensure a well-coordinatedand integrated capability.

4. Cost reduction reviews are included as part of the internalaudit plan.

5. A standard reporting structure has been implemented tomeasure and monitor progress.

6. Cost reduction targets have been identi ed for short-, medium-and long-term implementation.

7. Personnel can clearly articulate what success will look like andunderstand the broader vision and business de nition of thebene ts of the program.

8. Performance measures are built into personnel scorecards.

9. Budgets are redrawn after the cost reduction changes havebeen introduced taking into account the sustainable bene ts.

10. The organizations metrics are adjusted to re ect the impact ofthe cost reduction efforts.



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Author

Prof. Dr. Kai-Alexander Schlevogt (PhD Oxford)serves as Full Professor of Strategic Leadership atthe Graduate School of Management, St. PetersburgState University (GSOM SPbU), Russia, Directorof the GSOM St. Petersburg University-HEC ParisDual Degree Executive MBA Program, Director ofthe IBM-GSOM SPbU Growth Market LeadershipProgram, and Area Editor, Asia-Paci c and CIS/CEE ofPerformance Journal .

Article


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According to a popular German tale, onceupon a time the citizens of Cologne bene tedtremendously from the hard work of housegnomes, called Heinzelmnnchen, who laboredfor them secretly during the night. Amongother things, the diligent little creatures cleanedtheir houses, baked bread and made garments.

Shopkeepers were able to prosper without hiring any staff as thegnomes did all the work for them while the businesspeople relaxed.Unfortunately, after the curious wife of a tailor laid out a trap tospot them, the members of this mythical species left, putting anabrupt end to the good times.

Even though busy leaders in dispersed locations cannot availthemselves of the magic services of these legendary Germancreatures, they nevertheless would probably enjoy a bonanzaif they adopted the little fairy strategy. This approach relieson proxies (or surrogates), termed H-mannikins, to get workdone. These organizationally embedded helpers, who are notalways visible, relieve movers and shakers in different types oforganizations of many toils. More speci cally, would-be rainmakerscould bene t greatly from developing a diversi ed portfolio ofmutually reinforcing, high-leverage headship surrogates andmanagement surrogates. These can be created at multiple levelsfor different durations on a spectrum ranging from soft to hardapproaches, as well as operational to strategic tools, either insideor outside the organization.

Debottlenecking leadership:

how to create high-impactsurrogates to focus on

strategic essentials

Debottlenecking leadershipby using surrogates


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Truly enabling, high-leverage surrogates free up invaluable leadership bandwidth, givingexecutives latitude and power to step back, see the big picture, confront megachallengesand realize great dreams. Thus, they can focus on transformational leadership, fullyleveraging their creativity to promote innovation, instead of only engaging in transactionalleadership. H-mannikins are particularly vital in emerging markets where executive talentis frequently scarce. For example, in a survey conducted by McKinsey & Co., 28% ofexecutives in China identi ed management as the function in which rms will encounterthe most dif culties in recruiting the right kind of talent.This area topped their list of staff shortages, ahead even

of specialists in R&D and product development, which only17% of executives expected to be the key talent bottleneck.

It is of the utmost importance for executives toremedy lopsided patterns, such as an imbalancedwork con guration. Moving away from manager-heavyarrangements releases tremendous, positive energy atall levels. Instead of overstretching themselves, trying todo everything personally and nally collapsing, leaderswho use embedded H-Mannikins can indirectly generatesigni cant impact.

The litmus test of the little fairy strategy is that, if itis working well, followers are likely to believe they haveachieved the results themselves. But in reality, the successwas due to their shepherd, who generated and con guredthe surrogates, so that all these elements were in syncand created the best outcome. Leaders effectiveness willbe further enhanced, because, once freed from the taskscarried out by the H-mannikins, they will be able to focus ondeveloping creative solutions in the areas that matter most.Would you like to explore the little fairy strategy, throughwhich leaders can enable and empower themselves whileserving as a catalyst for their followers?

Outstanding leaders act like world-class chess players.Before deciding on what to do next, they compute thepossible immediate outcomes of their action and ponderover a series of moves in the more distant future. Such anapproach is vitally important in rapidly growing, emergingmarkets, where one seemingly trivial commitment often triggers an overwhelmingdemand for myriad additional resources.

1. The organizational center often underestimates the leadershipand management capacity needed to develop sustainablebusinesses in the periphery, such as emerging markets in theWest or mature markets in the West, which are managed froma center located in former developing countries.

2. Instead of overstretching themselves, leaders should put inplace powerful surrogates that help them perform variousstrategic and tactical tasks more effectively than if they hadtried to do everything themselves.

3. Potent surrogates free up leaders time, energy and capacity,

allowing them to focus on those areas where they can addmost value.

4. Feedback loops, coupled with effective incentive systems,can be used to spur successful corrective action, particularlyat the grassroots, without a leader having to intervene andimpose rules that are often outdated by the time they comeinto effect.

5. Without a suitable organizational setup, leaders are likely toperennially miss targets, irrespective of how skilled they areand how much effort they put in.

Copyright 2011. Prof. Dr. Kai-Alexander Schlevogt. All rights reserved.

Figure 1. Five big ideas at a glance


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Unfortunately, the strategists in the headquarters of long-established multinationalcompanies often underestimate the leadership and management capacity needed todevelop sustainable businesses in emerging markets. Interestingly, their counterpartsin emerging market companies that have only recently embarked on a global expansioncourse often suffer from the same problem. As a result, both types of planners fail to makeadequate provisions (for a summary of the ve key messages, please refer to Figure 1). Inmany cases, they commission a few enthusiastic pioneers and send them to challenginglocations. The spearhead troops are usually quick to call for reinforcement at all levels,which frequently cannot be supplied immediately by the unprepared center.

It is noteworthy that with increased scale, both more expatriates and local talent will beneeded in absolute terms, while the proportion of expatriates required is likely to decrease

when the local operationsexpand. Since executives inmost multinational enterprisesare facing problems inrecruiting and retaining talent,they ultimately feel compelledto engage in a war for talent.This is a zero sum game whereplayers compete for a singlepie and lose in proportion to

how much others gain.One solution to this problemof insuf cient leadershipand management capacityat all hierarchical levels isto increase the supply oftalent, preferably ahead of

demand. To ensure that the gains are not offset by the loss of valuable human resources,the companys chief must craft golden chains bonding competent employees to theorganization. This approach is likely to be very costly, though, as it usually requiresconstant external fueling of efforts, often through material incentives. Since manycompanies mostly use monetary rewards for this purpose, their employees often feel and

act like mercenaries who only execute orders as long as they are paid.

In fact, the competition for scarce human resources in many regions of China, for example,has led to a salary explosion, quickly eroding the position of these locations as geographiccost leadership platforms. Besides, retaining talent is dif cult in many emerging marketswhere turnover rates are often high because a lot of employees do not hesitate to leavetheir employer to take on better-paying jobs or set up their own enterprises as soon as anenticing opportunity arises.


Truly enabling, high-leveragesurrogates free up invaluableleadership bandwidth, givingtorch bearers latitude and powerto step back, see the big picture,confront mega-challenges andrealize great dreams.


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An alternative, highly effective yet often overlooked strategy for dealing with the talentcrunch is to reduce the demand for certain activities exclusively performed by oneformal leader by means of creating management surrogates. Since they reduce theadministrative load of movers and shakers, they increase their maneuvering space.Those at the top thus can spend more time on strategic leadership tasks, such asinterfacing with a variety of powerful constituencies, making sense of the environmentand shaping it in innovative ways, identifying opportunities and threats, charting novelcourses for the organization, and mobilizing the collective. Leaders can even developheadship surrogates, which are

replacements for some of thesesophisticated activities. This movecreates additional opportunitiesfor executives to specialize in thefunctions that constitute their truecalling and sharpen their focus on whatmatters most.

Interestingly, a combination of thesesurrogates can also be used to reducethe impact of poor leaders, sincethey can be designed in a way thatremoves an individuals discretion and

degrees of freedom. This is particularlyhelpful, for instance, when it is dif cultto remove and replace a leader atshort notice.

By putting proxies in place, executivescan progress from what can be calledDanad management, which is asunproductive as the daughters ofDanaus attempt to ll a vessel full ofholes, to the new model of enabled-catalytic leadership (ECL) (seeFigure 2). The leadership sweet spot, where maximum value is created, is located at the

intersection of all the well-tuned surrogates. Below, some examples of effective, mutuallyreinforcing, multi-level headship and management surrogates are given.

Figure 2. Leaders must build diversi ed portfolio of mutually reinforcingsurrogates (con guration of Little Fairy Portfolio)

Copyright 2011 . Prof. Dr. Kai-Alexander Schlevogt. All rights reserved.

H-mannikin

Leadershipsweet spot

From Danad Management ... ... to Enabled-Catalytic Leadership (ECL)

Professionalindividuals

Enablingtechnology

Embeddedintangibles

Formalorganizational

devices

Smartoutsourcing

Halo of rolemodel


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2. Halo of role modelFirst-rate leaders, especially those who possess an awe-inspiringquality, can serve as exemplars of desired behavior and establishstrong emotional bonds with followers. Even when there is nolonger any direct interaction, followers are likely to emulatethem, because they regard such superiors as their heroes, feelspellbound by their mystique, are swayed by their nimbus, andare truly committed to making them happy by satisfying theirwishes, whether directly expressedor implicitly understood, at all cost.A good example of this form ofsocial capital is the lial relationshipbetween certain religious believersand their spiritual leader. The formeroften act like children who are eagerto please their father without hisprompting, ideally because they lovehim, not because they fear him.

The in uence of leaders cancontinue long after their death

via the spontaneous transmissionof legendary stories about theheroic champion and paragon ofchivalry from one generation to thenext, possibly complemented by acarefully cultivated personality cult.

To succeed in emerging markets,a company needs to developsenior leaders who model effectiveentrepreneurial action in complexand volatile situations. Ideally, theyare endowed with a halo, such as

that of a battle-hardened general,and an aura of authority. Then,followers are likely to revere them, easily connect with them,emulate their behavior and feel an urge to serve them whole-heartedly without needing a reminder or incentive.

Grave crises, which are no rarity in emerging markets, providea great opportunity for top leaders to gain what can be calledcharisma points. This is because followers tend to give highlyexposed leaders more credit and consequently attribute more

special qualities to them when the superiors succeed against theodds with dramatic, highly visible, innovative and ingenious action.In times of great upheaval, followers are more likely to acceptradical and novel solutions, since they have a sense of urgencyoften bordering on despair. This makes them willing to enduregreat sacri ces in the hope of betterment.

So far, we have seen that rst-rate leaders can root intangibleassets, such as powerful values functioning as implicit contracts,

deeply in the organization and act asattractive role models, making followerseager to please and emulate them withoutthe need for prompting. Next, we willlearn how a mover and shaker can createthe following additional, high-leveragesurrogates for the purpose of freeing uptime, energy and capacity to focus, inparticular, on strategic issues.

3. Professional individualsCompetent professionals with a special

vocation, such as lawyers or doctors, canserve as effective surrogates, decreasingthe demands placed on a leader in manyareas. Those were selected and certi edby a special community whose core valuesthey internalized after undergoing intensesocialization. Besides, a rm can employprofessionally-minded individuals fromother relevant disciplines, which do nothave the same specialized educationand certi cation requirements as thelearned occupations.

Moved by their calling, guided by theirethos, proud of their independence and

equipped with the necessary skills, in the best case scenario,professionals can lead themselves. At the minimum, they cancomplete a signi cant amount of work with minimal coaching,enabling leaders to concentrate on those areas where they can addmost value.

It is extremely important for a prime mover to engageprofessionals whose traits, motives and skills are complementary,

a combination ofthese surrogatescan also be used toreduce the impactof poor leaders,since they canbe designed in away that removesan individualsdiscretion anddegrees offreedom.


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thus acting as a balancing force and closing gaps in the superiors leadership portfolio.This way, executives can focus on their strengths instead of constantly trying to overcometheir weaknesses, which is a time-consuming and often futile endeavor. For example,a visionary CEO intent on achieving step-change improvements is likely to bene ttremendously from a competent chief operating of cer (COO) who possesses a differentleadership DNA. Acting as a chief of staff, the latter can ensure that the organizationalmachine runs smoothly, making it possible for the CEO to focus more on interfacing with

external stakeholders and developingcompelling dreams.

To produce a critical mass ofsurrogates, which is especiallyimportant in opportunity-richemerging markets where resourcesare particularly scarce, a leader shouldconsider hiring gifted professionalseven if their backgrounds do notmatch the immediate organizationalrequirements. The eminentmanagement consulting rm McKinse& Co. applies this precept successfullyacross its global operations. Instead

of only tapping into the pool ofMBA graduates, the rm recruitsoutstanding individuals without abusiness education, such as medicaldoctors. These non-traditional hiresthen complete an intensive, internalMBA program that lasts only fourweeks but covers most of the core,full-time MBA curriculum taught at theworlds top business schools.

As a positive side effect, rms that hirea variety of professionals also bene

from increased diversity. To keep theirprofessional spirit alive, help themmaintain their independent perspectiveand avoid the danger of brainwashing,which may lead to herding behavior,

they should be encouraged to remain active in their respective professional associations.Leaders should also inculcate other employees with a sense of professionalism, in orderto make them more independent and effective. This move will increase the quantity andquality of surrogates.



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4. Formal organizational devicesShapers can also develop formal organizational surrogates, suchas specialized structures, processes and systems. For example,leaders may set up temporary groups for speci c challenges.Often, such task forces can govern themselves. If the membersform a really effective team instead of simply remaining anef cient work group, much cross-fertilization is likely to take place,resulting in valuable intellectual and social capital. Alas, many all-star groups never transform themselves into real teams, becausethey lack leadership.

Apart from using ad hoc work groups and teams, which may solvenon-routine issues through a process of negotiation, the leader cancreate specialized, permanent roles and units for various purposes.For instance, an ombudsman may be appointed to resolve con icts.Moreover, the leader can set up standing committees dealingwith ethical dilemmas and other recurring issues faced by theorganization. Or an internal think tank could be charged withdiscerning megatrends and generating strategy proposals, amongother things.

As regards the structure of their inner circle, a headperson mayappoint a powerful chief of staff and highly competent executiveassistant, who take over a signi cant amount of operationalwork. A general staff can offer formally documented disinterestedopinions on leadership challenges. An example is a con ict ofinterest encountered by the CEO that needs to be resolved inthe absence of clear rules, thus requiring discretionary decisionmaking. In addition to freeing up the leaders bandwidth, thisadvisory body increases transparency, strengthens accountabilityand facilitates error correction. Undoubtedly, the person withultimate responsibility always remains responsible for all thedecisions thus taken. But when coming under attack from critics,commanders who have always been open and used their general

staff wisely can at least point to the fact that they consultedcompetent advisors and did not hide important facts.

In addition to these structural devices, standard processes (such asformally laid out decision-making steps, and management systems(e.g., facilitating organizational learning) can liberate those inpositions of power from many burdens.

5. Enabling technologyLeaders can also leverage intelligent technology to render theirinvolvement in some strategic and tactical activities unnecessary.Among other things, electronic means can be used as catalysts formaking existing, redesigned or new management processes andsystems more effective and ef cient.

In simple, fairly predictable business environments, it might bepossible to perform routine tasks using algorithms. However,

in uncertain and complex settings, recursive and unambiguouscomputational procedures with nite steps cannot ensure aproblem will be solved. In such settings, engineering solutionsoften incorporate automated feedback loops. Since they allowfor self-correction, they are highly effective devices for adjustingquickly to changing circumstances. In an organization, suchresponsive, system-design features reduce time lags, too, and helpexecutives avoid the fate of the Danads, who were condemnedforever to pour water into a leaky vessel.

With technologically embedded feedback mechanisms andproperly functioning incentive systems in place, leaders cansigni cantly improve their chances of success in uncertain andcomplex environments. This two-pronged approach helps avoiddrafting rules for a set of conditions that may not have been fullyunderstood and might have changed before the guidelines havebeen implemented. Without such sensitive, technologically enabledprocesses, Danad managers might toil in vain, perennially failingirrespective of their competence and the efforts they pour inbecause their target is moving and they are always late.

As an example of effective loops, subordinates may automaticallyreceive real-time detailed performance feedback. This enables therecipient to take corrective action quickly without prodding fromtheir superior. They are even more likely to do so if such behaviorincreases their chances of achieving their performance targets andearn promised rewards that they value highly. By routing feedback,such as customer evaluations, directly to the employees, theinformation-processing task of higher echelons and control loss,arising from selective transmission will be reduced. The gains areparticularly signi cant if individuals, who are operating at thefront line in a fast-changing environment, possess relevant, local


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knowledge and are separated from key decision makers by manyhierarchical layers.

Such feedback loops are good examples of proxies that helpleaders obtain better results than if they had performed the taskthemselves. Freed from some administrative burdens, they maystructure their coaching sessions for subordinates differently.They could possibly afford to spend less time on speci c routineissues and instead discuss the followers career trajectory andcompetence development at greater length.

6. Smart outsourcingIntelligent outsourcing arrangements can serve as additionalstrategic or tactical surrogates for shapers. For example, amanagement consulting rm may be asked to assess acquisitionopportunities in an emerging market. But the prime mover hasto be very careful not to hollow out the core competence of theorganization and avoid becoming overly dependent on outsiders.

One option to decrease this risk is to use external consultants as aninterim means for gaining knowledge in new areas while buildingup internal surrogates.


ConclusionLeadership is the art and science of choosing a strategic gameboard full of golden opportunities, constantly creating spacefor maneuvering on it and generating valuable outcomes byfully using both the degrees of freedom thus gained and allthe resources that can be created, procured or mobilized.As we have seen, an important factor for succeeding in thechosen game is to free up the bandwidth that leaders have attheir disposal for thinking and acting. One way to accomplishthis feat is to create headship surrogates that decreasethe need for a leader to get involved in matters of strategicsigni cance. To reduce the amount of time spent on routinetransactional issues, such as dealing with simple, standardrequests, management surrogates can also be produced. If the

different types of mutually reinforcing surrogates are correctlydesigned, blended and used to maximum effect, they will helpto incessantly generate signi cant, positive results.

In most cases, leaders will actually need to spend more effortat the outset to create headship and management surrogates.The development of new ventures in emerging marketsincreases this initial burden. But once movers and shakers haveput in place productive surrogates for some of the activitiesthey previously performed themselves, they are likely toreap exponential returns on the extra investment. Havinglightened their yoke, leaders can focus on creating value thatis commensurate with their compensation. Surely, this is much

better than being paralyzed by administrative chores andconstantly defending themselves against allegations that theyare overpaid!

If you encounter relaxed magnates who get a huge amountof work done each day and consistently achieve signi cantimpact, the chances are high that, unnoticed by manyobservers, they practice the art of self-enabled and self-empowered leadership. The secret of their success is to drawon a potent army of well-aligned little fairies who are helpingthem in the background.

It is crucial to constantly focus on the utility of the H-mannikins,and incessantly increase their numbers, usage andeffectiveness. To remind themselves of the value of constantlyproducing new, powerful surrogates and continuously usingthem to achieve more with less, leaders should considerrepeating the following vital mantra several times per day: Themost important task of a leader is to get the right things donein a better way by using a variety of instruments other thanoneself as levers!

To succeed in emergingmarkets, a company needs todevelop senior leaders whomodel effective entrepreneurialaction in complex andvolatile situations.


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Article


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Making sustainabilitysustainable in China:

a supply chain perspective

Author

Dr. Martin Lockstrm,Director BMW-SMIEndowed Centre forPurchasing and SupplyManagement; DeputyDirector CEIBS-SiemensCentre for Sustainabilityand Supply ChainManagement, China

C

ompanies are facing greater levels of risk thanever before. As outsourcing and globalizationincrease, supply chains are becoming more andmore fragmented and geographically dispersed.Then there is the added complexity of differenttime zones and cultural and linguistic barriers.This increased fragmentation has also reduced

transparency across supply chains unless mitigated via improvedinformation sharing. A lack of supply chain transparency not onlyslows down business activities (e.g., through delays, inaccurateforecasts) but also increases the risk of opportunistic behavior,such as non-compliance to contract terms. We have seen manyinstances of this phenomenon in recent years, for example theMattel Toy Story, the melamine scandal, the tainted pet foodand toothpaste scandal, and so the list goes on.

At the heart of the problem often lies a nave belief, amongcorporate executives, in outsourcing business operations in orderto improve short-term nancial metrics. This should not be aproblem per se; alignment of the managers personal interestswith the companys is often a desirable outcome that drivesperformance. However, the problem is that the same executives,whether consciously or unconsciously (but always erroneously),sometimes outsource responsibility and accountability for businessactivities. When this happens, the company is no longer in control;instead, its destiny is in the hands of its supply chain partners(such as suppliers and distributors). Nowadays, it is not aboutcompetition between companies but between supply chains. Asthe old saying goes, your supply chain is never stronger thanits weakest link. In other words, if your supplier has a problem,

Making sustainabilitysustainable in China


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you have a problem. No matter how strong your contractindemni cation clauses are, rest assured that you are going to gethammered by consumers, non-governmental organizations (NGOs)and other stakeholders if things go wrong in your supply chain.

Corporate scandals: the lessons to be learnedWhen it comes to corporate scandals, there are ve lessons to belearned. First, if we consider the recent melamine scandal in the

Chinese dairy industry, research showed that there is a very stronglinkage between severity of the melamine exposure and supplychain complexity. Simple supply chain mapping shows that thenow defunct dairy company, Sanlu, had a very fragmented supplychain where milk was bought from a vast number of farmers ormilk distributors. Others, such as Bright Dairy, were more verticallyintegrated with fewer suppliers, hence these dairies had moretransparency and control (see Figure 1).

Figure 1. Comparison of Sanlus supply chain (left) vs. Bright dairys (right)

Source: Flynn et al. (2009)

Self-owned largedairy farms

(210, best quality)

Small dairy farmcomplexes

(500, middle quality)

Cooperative largedairy farms(Good quality)

Milk dealers(Worst quality)

Milk dealers(Poor quality)

Dairyfarmers

Dairyfarmers

Raw milk collection

Raw milk collection

5%10%

95%90%

Manufacturing,quality control

Manufacturing,quality control

Cow raising

Cow raisingDairy

producers(Brightdairy)

Dairyproducers

(Sanlu)

The question is, canyou localize yoursupply chain andstill call yourselfsustainable?


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Second, the fact is that a scandal does not just have an adverseimpact on costs, it also severely taints a companys brand image,eroding revenues for a long time to come. The main pro t-erodingeffects are to the top line and subsequent shareholder valuedestruction. For Mattel, they have yet to recover from the lossafter their lead-paint incident (see Figure 2).


Figure 2. Mattels share price during 200710

Source: Yahoo! Finance

Jan2007

S h a r e p r

i c e

( U S $ )

2008 2009 2010 2011

10

30

20

25

15

Apr Jul

Incident becomesknown to insiders

Incident becomesknown to the public

Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Apr JulOct


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Third, manufacturers are ultimatelyresponsible for the goods that are deliveredto the end customer. And it is always thecompany with the most visible brand thatwill be slaughtered in the media frenzy.Companies that are now members ofthis less than noble club include Mattel,Hasbro, Danone, Nestl and Arla Foods. Insome instances, shareholder losses have

exceeded 50%, equivalent to billions ofdollars in value.

Fourth, the later that problems are dealtwith and communicated, the more costlythey get (in fact they grow exponentiallywith time), meaning that more effortshould be spent on prevention rather than re- ghting.

Finally, companies have a responsibilityand a vested interest in ensuring theiroperations are sustainable in the sensethat they do not harm customers or othercompany stakeholders, either directlyor indirectly.

Sustainability as acompetitive advantageAs the degree to which businessesoutsource their functions has increased,companies have simultaneously becomemore dependent on suppliers for valuecreation. In addition, sustainability hasbecome more important for customers and

it is now one of the key value drivers in themarketplace. Few customers today want tobuy products from companies that employchild labor, pollute excessively or generallybehave unethically or immorally. Thismeans sustainability is becoming a sourceof competitive advantage, just like priceand quality attributes.

The key question is: what is sustainability?Without doubt, it has become one ofthe hottest buzzwords in both academiaand business in recent years. Everyone

talks about it professors, corporateexecutives, politicians, environmentalactivists. Those who dont embrace it areusually perceived as laggards or plainignorant. Hence, everyone seems to be

doing it. Or are they? The concept ofgreenwashing as a pejorative term forhypocritical sustainability has, over time,become just as popular. After investigatingcountless companies on sustainability, itturns out that the key issue to successfulsustainability implementation is neitherplanning nor execution but rather reachinga consensus over what sustainability is all

about and getting management buy-in.Interestingly, there seem to be as manyde nitions of the term sustainabilityas there are proponents (and opponents)of it. The most common de nition,making decisions to meet needs todaywithout compromising needs of futuregenerations, has a lot of appeal and iseasy to embrace but leaves a lot to bedesired in terms of concrete measures toaccomplish that grand vision. For mostpeople, being sustainable typically means

reducing (or eliminating) use of child labor,pollution, energy usage and waste, etc.

The key issue for managers seems to bethe false belief that sustainability is costly


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and generates very few bene ts, hencemost invest in strategic philanthropy suchas tree planting in the Amazon rainforest,book donations to schools in rural Chinaand similar high-publicity activities. Butit is resource conservation that is reallythe core tenet of what sustainabilitymeans. It is not about spending hugesums of money on PR activities. And more

importantly, sustainability is not black or

white in the sense that either a companyis sustainable or its not. Instead, its acontinuum of progression (see Figure 3) as a matter of fact, many, if not most,companies today are sustainable to someextent without even knowing it. Havingsaid that, it should be in the interest ofevery corporate executive to embracesustainability as a means for boosting

organizational performance.


Figure 3. Path of progression toward sustainability

Source: IBM Institute for Business Value

The mantra among foreignexecutives in China today isthree-dimensional: localize,

localize and localize.

Adherence to lawin the countriesof production,operation anddistribution

Legal andcompliance

Strategicphilanthropy

Values-basedself regulation

CSR value curve

Ef ciency

Growthplatform

Alignment ofcharitable activitieswith social issuesthat supportbusiness objectives

Incorporates thecompanys valuesystem and/or codeof conduct to guidebusiness behavior

Measurable costsavings throughef cient or win-winscenarios

Access to newmarkets, newpartnerships orproducts/serviceinnovations thatgenerate revenue


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Sustainability in ChinaHistorically, China has lagged behind when it comes tosustainability. At a micro level, domestic companies can tend tooperate with a limited view on the subject, giving precedence toshort-term pro ts over long-term competitiveness. Sustainabilitycosts money is a frequently quoted argument. Interestingly, oneof the many reasons for the margin erosion in the manufacturingindustry often pertains to operational inef ciencies. However,due to the overall booming economic growth in China, domesticmanufacturers traditionally havent had to be too concerned aboutef ciency. But periodic dips in exports as a result of the globaleconomic crises due to low consumer con dence in developedeconomies, companies will either have to exit the market orimprove ef ciency to survive. This is particularly true given theincreasing competition from emerging hotspots in Central andWestern China and other emerging markets such as Vietnam,Indonesia and Cambodia. Hence, this is a good opportunity forChinese manufacturers to embrace sustainable business practicesas this will help boost their pro tability and, more importantly,help to position them as more attractive suppliers in the eyes ofoverseas customers.

At a macro level, China has become one of the most proactivecountries in the world, promoting cleantech industries,implementing tougher environmental regulations andpromulgating government policies to drive development. One ofthe most prominent examples is the 863 Program, named afterthe year and month of inception, where billions of dollars havebeen invested in everything from wastewater treatment to electricvehicle development. Considering the determination and swiftnessof the Chinese Central Government, it is highly likely that China willbe the leader in alternative energy use (cleantech), although it willtake decades to roll out nationwide. In the meantime, the US willhave an increasing sense of comfort, knowing it is no longer thebiggest polluter on the planet.


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Making sustainability sustainable in Chinassupply chainsIn the early days of Chinese manufacturing, overseas companiesencouraged their incumbent suppliers to come to China. Thesesuppliers in turn encouraged their suppliers to come as well and,step by step, entire supply chains were relocated to China. Atthe time, this was great news for those businesses coming in tothe Chinese market and pro ting from much weaker domesticcompetition. But now those same overseas companies operatingin China are facing stiff competition as domestic companies catchup in terms of technology and management. They are feelingincreasingly pressured to abandon their incumbent suppliers infavor of riskier, but potentially more rewarding, local suppliers.Hence, the mantra among foreign executives in China today isthree-dimensional: localize, localize and localize. In fact, thereis now a commonly accepted notion that the future to success inChina (and even globally) lies in companies abilities to compete inthe rough-and-tumble of lower-tier Chinese cities. Once mastered,champions will be able to leverage their strength in developedmarkets in China and overseas by exploding previously securepremium segments and turning them into mainstream segments.

If Western companies dont do it, it is just a matter of time beforetheir Chinese competitors do. Examples of Chinese companiesthat have already taken this path are Pearl River Piano and ChinaMedical. Whereas good examples of foreign localization in China byWestern companies are General Electric and Siemens.

In the process, purchasing managers are querying whether this isthe way to go. Price is low, yes, but how about quality and delivery,not to mention sustainability? There is a very simple explanation

for the lower prices of domestic suppliers, and primarily it comesdown to one thing people. Materials are cheaper, yes, but thereason why is the people who manufacture them. Commodities aretraded at one price globally (disregarding potential governmentsubsidies), so this is not the key cost advantage of China. In manydomestic companies, people work for lower wages, accept longerwork hours, often without contracts (and hence without socialinsurance) and also under less stringent job safety requirements.Combined with less regulatory requirements regarding pollution

and waste, domestic rms can keep a lower overall cost base.The question is, can you localize your supply chain and still callyourself sustainable? How can you ensure sustainability amongyour sub-suppliers when those same sub-suppliers increaseexponentially for every layer of the supply chain? In answer to the rst question, a unanimous yes.

A common problem when implementing sustainability (or any otherimprovement effort for that matter) is that changes are often shortlived and, in the worst cases, can be quite negative for corporateimage and revenues. Such a phenomenon, where improvementsare made but deteriorate over time, is prevalent in China. Thisis very much an indicator that implemented changes have notbecome institutionalized and only last as long as monitoring isin place (the Hawthorne effect). As our research has shown,the only solution is to get senior management buy-in from thesupplier, i.e., where the supplier willingly adheres to the buyersexpectations and believes the bene ts outweigh the potentialcosts incurred.

The solution is no different than when implementing total qualitymanagement (TQM) or lean six-sigma approaches it requirestop management support, teamwork, customer orientation andcontinuous improvement. All too often, overseas companies takea quick-and-dirty approach by only making some operationalimprovement at the suppliers site, such as improving the factorylayout. The problem is these efforts will only last as long asthe customers supplier quality engineers stay there the oldculture and mindset will still prevail in the suppliers corporateDNA. Without a long-term supplier development approach thatincludes middle and senior management training, any attempts toaccomplish sustainable improvements are doomed to fail. Chinesesuppliers are often very willing to learn and change but only aslong as the bene ts are apparent.


Sustainability is becominga source of competitiveadvantage, just like price andquality attributes.


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The nal challenge is to roll outsustainability throughout the entire supplychain something that for a long timehas been considered the holy grail ofsupply chain management. Although it isconsidered a utopia for most companies,there are a number of measures neededto make it happen. Firstly, convincing rst-tier suppliers to get onboard willingly,

as previously mentioned. Secondly,from a legal standpoint, it is importantto formalize sustainability metrics andcorresponding targets as part of suppliercontracts. The bene t is that it means anincentive/penalty mechanism is in place.It also allows pursuit of legal means andclari es accountability in the event thisis necessary.

Thirdly, a genuine supply chain perspectivehas to be adopted, where sustainabilityimprovements are not only limited to rst-

tier suppliers and customers but across theentire supply chain.

The obvious question is how to monitorand control a complex web of supplychain partners in an ef cient manner?This conundrum has puzzled supply chainprofessionals and scholars alike since thedawn of supply chain management. Clearly,with an exponential increase in the numberof supply chain nodes for each echelonupstream or downstream the supplychain, the task of end-to-end supply chain

management has invariably been perceivedas more of a utopia than a reality.

However, there are approaches thatcan at least improve the situation, if notcompletely solve the challenges. At theCEIBS-Siemens Centre for Sustainabilityand Supply Chain Management at ChinaEurope International Business School,research on the use of social networkingtechnologies for supply-chain-widecompliance management has recently

started. The key to solving the challengeis pragmatism; its simply not feasible torely on building centrally managed datawarehouses and doing exhaustive physicalon-site inspections. Instead, with theadvent of cloud computing technologies,supply chain partners must instead lookafter their own data and their directsupply chain echelons one tier upstreamand downstream the supply chain. Inorder to ensure compliance, supply chainpartners must go through a computerizedself-assessment and provide evidencethat can back up statements. In case ofinconsistencies in their responses, built-inarti cial intelligence can alert operatorswhen more thorough physical inspectionsmight be needed. Once available, the datacan be aggregated to form a computerizedmodel of the entire supply network.In summary, future sustainability andsupply chain management is not aboutexhaustiveness, but pragmatism, noteliminating risk, but minimizing risk.Only in this way can overall effectiveness

be optimized.

Nowadays, it is notabout competitionbetween companiesbut betweensupply chains.


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1. Get people involved Make sure top management get involved to drive initiatives

Ensure that staff have received basic training

Make sustainable procurement part of employeeintroduction training

Make sustainable procurement part of staffincentive schemes

Conduct staff training on a continuous basis

Reward achievements and award initiatives internallyand externally

2. Develop policy Set up sustainability objectives what are the key goals?

Set up a sustainability procurement policy that is derivedfrom a broader sustainability policy

Use the policy as a communication tool internallyand externally

Develop a sustainable sourcing strategy based on policydocuments and have senior managers endorse it

Review and update the strategy on a continuous basis

Establish a sustainability code of conduct for all suppliers

3. Establish a sustainable sourcing process Perform a spend analysis and assess the impact of major

material groups and services

Incorporate sustainability criteria in supplier contracts

Award contracts based on value for money, not price

Assess sustainability risks and conduct life-cycle analysis onmajor supply categories

Set up key performance indicators (KPIs) for sustainability

and implement reward/penalty schemes for supplierperformance measurement

Utilize modern cloud-computing technologies to gather,aggregate and analyze supply chain data

Share best practices

4. Engage suppliers Involve key suppliers in policy development

Develop shared vision and objectives with key suppliers

Make sustainability part of supplier evaluation andauditing processes

Make sustainability part of supplier development programs

Award suppliers depending on sustainability performance

Involve senior management from own company andsupplier in sustainability programs

Foster continuous sustainability improvementsamong suppliers

5. Measure results Set up sustainability KPIs and scorecards

Collect sustainability data across the supply chain notonly within own company

Assess sustainability KPIs and compile results

Make sustainability part of procurement performancereports and communicate with purchasing staff,other departments, senior management, othercorporate stakeholders

Communicate scorecards with suppliers and developimprovement plans implement

Invite independent auditors to track results

Dont be too exhaustive utilize technology smartlyto foster pragmatism regarding supplier monitoringand control

Communicate success!

Five quick steps toward a sustainable supply chain


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Article


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The rules of play:what businessescan learn fromgame technology

Author

Andrew Stone is afreelance business

journalist

More and more companies are applying game-like features to theiradministrative processes and staff motivation strategies, but how likelyis it that the trend will stand the test of time?

Humans spend more than three billion hours a week playing computergames. It is a stark reminder of the impact that todays computergaming industry has on our daily lives.

Now its in uence is spreading beyond the entertainment sector intomainstream businesses, government departments and the classroom. The immersive,addictive elements of computer games have the power to motivate and engage us in newways, say the early pioneers of this trend, awkwardly labeled gami cation.

Game-like elements have a unique potential to change the way organizations engagepeople to sell them new products, teach them or nudge them into socially or personallypositive outcomes. Game designers are effectively becoming the architects of a newgeneration of businesses, smarter organizations and, perhaps, more harmonious societies.

While these may seem bold even utopian claims, the human love of game play,combined with the mass adoption of computers, is already a force that cannot be ignored.Weve been playing computer games for 40 years now, engaging people and teachingthem how to use interactive interfaces with a built-in tutorial mechanism, explains RickGibson of UK-based Games Investor Consulting. Games are the rst, and most popular,movers on to new digital platforms such as the iPhone and iPad. They are heavilyembedded in our culture.

What businesses can learnfrom game technology


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Gami cation in business

Applying game-like features to learning, business or even dulladministrative tasks can transform them by ring our imaginative,as well as our competitive and cooperative, instincts.

Businesses and organizations large and small are already seeingresults from gamifying their activities. Examples include mobilesocial web start-up foursquare, which engages users in the mannerof a game by encouraging them to check into locations such as

cafs and bars. Quest2Learn is a promising experiment into thepossibility of enthusing students by including game-like features inthe school syllabus.

Marketeers, in particular, have been among the earliest to spotthe potential for using gami cation to boost sales and bolstermarketing activity. NBC Universals USA Network, for example,used a gami ed website to drive a 40% increase in viewers of itscult series Psyched .

The potential goes beyond education or marketing, however. Bydesigning game-like elements into its business travel scheme, forexample, Google has managed to induce its employees to share

budget-saving tips with one another, saving the company millionsof dollars. For every city, employees receive a capped amount. Ifthey spend less, they are allowed to bank the difference, whichthey can use to upgrade a trip at a later date. Alternatively, theycan donate the sum to charity or keep half of it in cash.

Gabe Zichermann, author of Game-based marketing andGami cation by design , says that this approach has createdsubstantial behavior change. Employees talk about how to savemoney on travel all the time, but no one else has managed todo [what Google has done], he says. The net effect has beentremendous. It has saved millions of dollars.

Large organizations are using gami cation to transform routineprocesses and motivate staff. US retailer Target recently built acheckout game for cashiers. They play it while serving customersand the system gives them feedback on how they are doingcompared with their peers.

We dont have a lot of data on that one yet, but, anecdotally,cashiers love the games, says Zichermann. Being a cashier sucks you do nothing but serve person after person and it seems thatemployees value being given a system to master and manage.

New York-based online loyalty scheme company Next Jumpis another example of gami cations potential. It wanted itsemployees to adopt healthier lifestyles and hoped to bene t fromcheaper employee health insurance policies as a result. It createdan app that logs when employees check into the gym, allowingthem to form teams to compete in a league for a pot of money.After its introduction, 70% of employees got involved on a regularbasis, and both absenteeism and staff turnover fell.

Software company Rypple is helping large organizations,including Facebook, to improve the experience of performancereviews, team working and meetings. It uses game-like systems

to help employees to connect with one another, visualize tasksand comment on one anothers work. They help employer andemployee track overarching goals, as well as the smaller tasksassigned to individuals. They also provide a means of sendingvirtual thanks and use graphical progress bars to track work.

The goal setting and constant feedback of the Rypple systemresemble a combination of the experience of using both socialnetworks and mass role-playing games, such as World of warcraft


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There is good reason for this, says Gibson. Gami cation is set to bean in uential trend because it is generational. Increasing numbersof us have grown up with, or become accustomed to, interactivegame play. While 65% of under 35s play games regularly, that gure rises to 99% of under 12s.

Large organizations that are seeking to attract and keep youngtalent now and in the future will have to take note of howdifferently members of the gaming generation think, whatmotivates them and how to harness their potential by engagingthem in the right way.

This is not only a trend for the next generation, however. Mostadults are familiar with computer game-style interfaces andrespond well to them. We are, in short, all gamers now, saysGibson: Two generations have grown up with computer gamesas part of their mental landscape. Although many adults do notidentify themselves as gamers in media habit surveys, the fact isthat they still play games.

A burgeoning industry is already taking shape that aims to explorethe possibilities of gami cation. This includes academic studies,books, conferences and a thriving service community that offers

to provide out-of-the-box gami cation for company websites andinternal processes.


Two generations have grown up withcomputer games as part of their mentallandscape. Although many adults do notidentify themselves as gamers in mediahabit surveys, the fact is that they stillplay games.


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Evolution or revolution?

Can gami cation really change organizations and even theworld for the better? While its promise is great, it is still a smallindustry and one whose value is hard to measure. Gibson dismissesthe grander claims made by some market research and estimatesits value today at a relatively small US$100m.

There is evidence that some of the companies that are eager toget involved are missing the point. While the potential to engage

people through game-like elements is theoretically without limit, anattempt to harness it without understanding the core elements thatmake it work could lead to wasted time and money. The failure ofadvergaming (advertising-led gaming) to take off commercially isa good example of the way in which game-like features can quicklybecome outdated and inspire, at best, passing engagement.

Richard Bartle, Professor of Computer Game Design at theUniversity of Essex, UK, and a veteran computer-game designerbelieves a healthy skepticism is worth cultivating. The applicationof super cial game elements such as badges and leaderboards canbe faddish and short-lived, he warns, and will not in themselvesproduce results if users are not engaged or grow bored.

Some of the claims made for gami cation are perfectly ne, but,in the long term, gami cation is but one stratagem in the armory,he notes. Can you give people worthless things and expect themto keep coming back for more? A pat on the back with pointsyou can do nothing with will wear off. People wont be tricked asecond time.

Gibson agrees that simply adding points or badges to an aspect ofan e-commerce site or an internal process will fail to engage users.Adding a gami cation layer to your activities will not work unlessyou have a good games designer who understands what motivatesplayers, he says.

Certain key elements de ne the successful examples ofgami cation, says Zichermann: It needs to have someachievement and reward system built in, it needs to create constantpositive reinforcement and it needs a viral feedback loop thatbrings other people in.

The acronym SAPS (status, access, power, stuff) summarizes whatmotivates people in game-like circumstances. Happily, it goesfrom the most important and the cheapest to the most expensiveand least important, he adds.


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Conclusion

Evidence from a diverse group of gami cation pioneers has alreadyshown that applying the immersive elements of computer gamesdynamics to non-game contexts can help organizations engagetheir people or customers.

But while gami cation is already producing some interestingresults in marketing, employee engagement, education andinternal processes, inevitably there are also examples of lesssuccessful applications of the trend. Just adding a leaderboardor a series of virtual badges to the activity in which you seek toengage people risks being a passing fad and a waste of time, effort

and resources.

Good games design, using designers with imagination who are alsocapable of understanding their target audience, together with ade ned and measurable objective, is fundamental to successfullygamifying an activity.

Considering the hierarchy of factors that motivate gamers (status,access, power, stuff) will help build immersive game elements.Properly constructed, gami ed processes will provide continuouspositive feedback for users, engaging their curiosity, sense of fun,their competitive and also, perhaps, their cooperative instincts.

Measuring the success of a gami ed system involves considering ve engagement metrics (recency, frequency, duration, virility andratings). These can be used in the testing process along with otheranalytics and optimization techniques (such as split testing) toimprove on the system and achieve optimal results.


You need a gamedesigner who canunderstand the

motivation of theplayer. The systemsyou develop dependon what you want toincentivize peopleto do.


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Better customermanagement: makinga difference at Reale

Case study

Author

Borja Tornos is asenior manager in the

Performance Improvementinsurance practice,

Ernst & Young, Spain

The Spanish insurance market is the fth largestEuropean market in terms of net premiums peryear, reaching nearly 60 million euro in 2010.However, in recent years, the Spanish insuranceindustry has experienced a signi cant slowdownor even negative growth in some property andcasualty (P&C) products, such as motor or

household, due to problems with the economy.

The outlook for the insurance market is undoubtedly closely linkedto the ability of the Spanish economy to recover from the current nancial crisis. But there are also additional, speci c challengesthat it needs to face, such as new regulatory scenarios (e.g., BaselIII, Solvency II, IFRS4), direct distribution channel development,customer behavioral modi cation and margin pressure due tohigher levels of competition.

For this reason, the industry has begun to introduce and apply thelessons learned by the banking industry, i.e., a refocus on customerstrategy. Managers and top executives from leading companieshave recognized their large and often untapped customer base asthe foundation for sustainable competitive advantage.

Building long-term pro table customer relationships, by avoidingcustomer attrition and improving customer experience, hasbecome the priority.


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Customer management:making a difference at Reale

The impact of the culturalchange necessary to ensure the

success of the new vision couldnot be underestimated.


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Introducing RealeReale Seguros Generales is wholly owned by Reale MutuaGroup, which was the rst mutual insurance company in Italy,founded in 1828. In Spain, it is a major multiproduct insurer.The companys core business has traditionally been motor andhousehold products, which represent nearly 80% of total turnover.However, during 2010, Reale set up a new life company and hasbegun to commercialize health insurance products through adistribution agreement.

In the past, Reale has invested signi cant effort and resourcesin trying to develop its customer proposition without externalcollaboration or assistance. However, the company has had limitedsuccess in achieving this. A change of approach was necessaryand Ernst & Young was selected from among some of the leadinginternational consulting organizations and niche players to helpthe company. We demonstrated a better understanding of Realesrequirements, a deeper business and customer managementknowledge, robust methodologies as well as an integratedcustomer approach and skilled team.

The main objective of the project was to place the customer at thecenter of Reales business. To do this, a new competitive modelneeded to be developed that would be shared by all the areasinvolved in enhancing customer experience, service level andsatisfaction. All of which are key levers for driving pro table, long-term growth.

The starting point was a customer rapid assessment to enable usto get a better understanding of the companys customer strategy.It also helped us identify and prioritize those initiatives that wouldallow Reale to become a truly customer-centric organization.

Customer rapid assessment and gap analysis

We conducted our initial diagnosis using our global frameworkfor customer advanced management model. The output revealedthat Reale did not have a strong base from which to beginits transformation process. The company needed to invest incustomer knowledge, IT support platforms and commercialexecution. However, when it came to distribution channels, thecompany was in a much better position.

In terms of customer knowledge, Reale did make use ofcustomer segmentation . But this segmentation was basedonly on financial parameters and didnt allow specific anddifferentiated strategies per segment to be defined. Theresultant customer segments didnt share common needs andbehavioral characteristics. It also wasnt supported by thetechnical department nor used by the commercial network. Inaddition, it wasnt possible to update it. However, Reale hadgood market research capabilities and was developing effectiveand well-addressed satisfaction and quality surveys.

There was minimal use of customer information and no

systematic, integrated approach or data mining tool. Businessintelligence was underdeveloped and there were no analyticalmodels either preventing customer attrition or detecting cross-selling opportunities.

The value proposition was based mainly on product andgeographical drivers rather than customer segmentation. Theattention and relationship model was the same across thewhole customer base. Customers were seldom contacted byReale regarding commercial propositions.

Regarding organization and control structures, Reale hada customer department with skilled professionals but theywere isolated and working independently from the rest of

the company. Reale used a financial balanced scorecard butthere were large gaps when it came to tracking and followingcommercial activity and achieving goals.

When we began to work together, Reale was just completinga strategic, IT platforms development plan. As part of thatproject, they developed a data warehouse with specific,commercial data mart, customer files and a dedicated site fortheir commercial network. They had also made the decision topurchase a campaign management administration tool.

Reale may not yet have nishedits transformation process but itcan already proudly regard itselfas a customer-centric business.


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Figure 1. Ernst & Young customer advanced management model global framework at start of transformation process

Planning Organization and control

Centralservices

Direct channels

N e

t w o r k r e

l a t i o n s h

i p m o

d e

l ( b u

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O r g a n

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( f u n c

t i o n s a n

d r e s p o n s

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C u s t o m e r r e

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i t i z a

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i n t e n s i

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S e g m e n

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t i o n

O f f e r

d e v e

l o p m e n

t

Execution

Advance Medium Basic/not developed Ongoing

Commercialdatamart

Customer le

Dataminingtool

Campaignmanager

Businessrule modeler Pricing tool

Operational model Service factors

Strategic segmentation

Lifetimevalue

Businessintelligence

Pricing

Retention

Loyalty

Cross selling

Acquisition

Marketresearch

Special segments

CustomereconomicsLoyalty

Networkdedicated

sitesCommercial

agendaReporting

toolCommercia

balancescorecardIT support platforms

Multichannelcustomer

shared model

Traditional channels

O w n e

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f o r c e s

N e w m a r k e

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Traditionalmarkets

Marketpotential

Distributionchannel

optimizationand resizing

Commercialexecutionguidelines

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programs

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t r i b u

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Managementstructure and

guidelines

Customer experience

Quality

Market potential

Satisfaction

Behavioral studies


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Road map andtransformation programWe prioritized customer knowledgedevelopment as the key strategic lever totransform the organization. The impact ofthe cultural change necessary to ensurethe success of the new vision could notbe underestimated. We therefore made

a big effort with regard to knowledgetransmission, communication andtraining programs.

We also helped develop a new governancemodel for the commercial area supportedby a balanced scorecard speci c to thatteam. We designed a structure thatincluded a number of new committees

across the organization to help facilitatethe new customer vision.

a) Rede ning and enriching customerstrategic segmentation was thecornerstone of the new customermanagement model. Effectivesegmentation establishes acommon ground for a fact-basedselection of strategies that helpsthe organization to optimizeinvestments in product development,channel management, campaignadministration, customer experienceand marketing communication.

Segmentation is a strategicprocess that identi es relevant andhomogeneous groups of customers

Figure 2: Strategic customer segmentation

Building long-termpro table customerrelationships, byavoiding customerattrition andimproving customerexperience, hasbecome the priority.

New

Not pro table/not managed

Fidelity/linkage

Promise Strategic

Maintenance

P o t e n

t i a

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l u e

( l i f e

t i m e v a

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High

H i g h

M i d d l e

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To linkage

Mass market

Low

Low pro tability

High pro tability

Middle


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with similar characteristics suchas needs, demands, attitudes andbehaviors that are signi cantly differenfrom other groups. Its overall purposeis to gain deep customer insight so that,in the long term, the organization isrealigned and centered around its mostpro table customers.

Our starting point was to understandthe key drivers of demand in theinsurance market and address theimportance of sociodemographiccharacteristics as a demand lever. Weconcluded that social class, age andlocation of residence (e.g., urban, rural,big city) were the primary in uencingfactors. We used this insight to gainan in-depth understanding of theunderlying motives and values drivingcustomer behavior. In this way, webuilt the segmentation based on

demographic micro clusters.The next step was to choose theprinciple segmentation criteria. Weselected customer loyalty, pro tabilityand potential value because thesefactors allowed us to identify whichcustomers could provide revenueincome both in the short and long term.This prioritization also helped withbetter resource allocation.

We were then able to establish differentservice models and strategies to tcustomer expectations. We coveredall the marketing mix drivers andwe reviewed the entire customermanagement cycle (subscription,renewal, claims, etc.) in order to setup a concrete relationship model withspeci c attributes per segment.



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b) The second phase was improving commercial ef ciency andef cacy by means of better business intelligence aroundcustomer management. We focused on trying to increasethe average number of policies per customer and avoidingcustomer attrition.

Traditional retention plan approaches aim to reduce the churnrate of clients by using analytical behavioral modeling forearly identi cation of those customers likely to cancel theirpolicies. In contrast, the Ernst & Young approach is to useanalytical modeling only as a part of an overall global plan. Theimplementation of marketing activities tailored speci cally tocustomer value and pro tability, together with highly skilledretention units within the companys call center, play animportant role in facilitating the whole process.

Increasing the level of product holding by cross-selling strategies represented a signi cant strategic opportunity asthey were far from industry best practice of approximately1.8 policies per customer. The main weaknesses were not asmall product range or even a lack of commercial activity, butinef cient target selection. Reale had been performing cross-selling campaigns for several years but it had still not designedand implemented a well-organized, systematic approach.

Statistical modeling meant we were able to identify well-de ned customer pro les with higher purchasing propensity.Once identi ed, we used our cross-selling framework toconduct quantitative and qualitative market research. Thishelped us to understand what sort of products and bene tscustomers would be more willing to buy based on their globalinsurance portfolio.

Finally, we designed a proactive and integrated multichannelcommercial strategy supported by a campaign management ITtool that ensured better, more organized opportunity handling.

This tool also meant it was easier to track the frequency ofcontact and avoid client saturation.



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Figure 3. Ernst & Young customer advanced management model global framework now transformation process is underway

Planning Organization and control

Centralservices

Direct channels

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t w o r k r e

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Commercialdatamart

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Businessintelligence

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Retention

Loyalty

Cross selling

Acquisition

Marketresearch

Special segments

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Networkdedicated

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Traditional channels

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Customer experience

Quality

Market potential

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Behavioral studies


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ConclusionReale may not have nished its transformation process yet but itcan already proudly regard itself as a customer-centric business.However, several challenges remain critical if the organizationis to optimize its model and achieve a sustainable, long-termcompetitive advantage. In particular, the distribution model mustbe realigned and direct channel operative models must be updated.

If we compare back to when we rst started working with Reale,it is clear that the company has made signi cant progress. Themain components of our customer management framework havenow been successfully implemented. But the full bene ts of our

approach will only be realized once they are fully understood,integrated and adopted by the whole organization.

c) The ability to quickly respond to customers everchanging demands and ful ll expectations is not

just about better business intelligence. Optimizingthe effectiveness of Reales commercial operativemodel was also critical. The pressure to becomemore effective required a rigorous focus onbuilding and retaining strong, skilled capabilitiesand implementing integrated IT support platformsand tools.

We collaborated in improving the commercialgovernance model by rede ning roles, functionsand responsibilities within the marketingdepartment as well as developing a neworganizational chart. We complemented theseefforts with a better relationship model betweenthe main areas of the company by creating newcommercial committee structures.

In addition, we reviewed and enriched commercialIT support tools , such as the commercial datamart, customer le and balanced scorecard, andsupported Reales ongoing and new projects suchas campaign management or the selection of a datamining tool.

Rede ning and enrichingcustomer strategicsegmentation was thecornerstone of the newcustomer management model.


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Going beyond nance:

Author

Fritz Wurm is ManagingDirector of InformationsManagement & Consulting(IM&C) GmbH, Germany

Planning and consolidationbased on accounts or with abias toward nance will not,in themselves, be enough to

ensure success.

Case study


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Integratingglobal supply

and value chains Decision-makers oftenassocia

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