Business as Unusual Survival Traits: Operational excellence, low cost and transparency
By Eric Dorré and Marik Brockman
Cycle after cycle, a couple times a decade or more, the economy endures crippling shocks, both endogenous and exogenous. Often referred to as “unprecedented” or “black swans” they are, in fact, the norm.
In each disruption, the businesses that emerge the strongest are finely tuned going into the crisis. Front-to-back, from customer acquisition through fulfillment, the winners are akin to elite high altitude climbers. They are the ones who are methodical about their “diets”, eating lean and healthy, eliminating dead weight and excess. Their preparation and planning is driven by data and science. Knowing conditions will change, they don’t plan for “ideal.” And they don’t go it alone. They rely upon and, in equal measure, support their peers, teams and suppliers to achieve their objective, live to tell about it, and do it again.
As in previous cycles, those who thrive off the back of this cycle will be fit and fine-tuned, and their core competency will be enabling adaptation of suppliers and customers. Whatever your industry, your focus should be on building a business that is capable of withstanding and thriving in conditions we call “business as unusual”.
Create a resilient businesses plan iteratively and collaboratively
In this series, we’ll explore common traits of companies across several industries that are built differently than most. Their leadership teams set a different expectation and tone than one might expect. Measurement isn’t for a quarterly or annual objective. Suppliers and partners aren’t seen as subservient, nor as vendors from whom to extract unilateral concessions. Their cultures and leaders value and reward front-to-back operational excellence. They grow organizations, internally and externally, that are built for change. They master adaptation (but not dominance) of the ecosystem:
Become and remain low cost, transparent and consistent
Partner, share and trust in order to extend capabilities
Abstract core capabilities into new markets or channels
Creatively exploit less agile incumbents’ weaknesses
Starting with the first in this list above, low cost, transparency and consistency, we will dive into these traits and share examples of companies that demonstrate most or all of them. Some are stalwarts while others are in developing stages of re-architecting their ecosystems.
What is true of all is that doing the right thing takes time. Measurement and improvement is continuous. Great leaders recognize this and put this at the core of everything they do. No matter if you run a business or philanthropic endeavor, whether it is rooted in the physical world or entirely virtual, you should study and abstract these concepts and ask yourself how they apply to your organizations and external business partnerships.
Do your culture, suppliers or customers enable you or deprive you of resiliency (and your future)?
What should you be doing every day to empower your own future?
Which processes and silos impede your progress?
Do you plan in quarterly or yearly cycles, or in an iterative, continuous cycle?
Are you planning at the departmental or regional level, or across your organization and with suppliers in order to enhance each other's businesses?
Operational excellence and the low cost provider
The most common trait of companies that are prepared for “business as unusual” is that they are low cost providers. Their core competency is end-to-end efficiency, enabled by not rooting out cost for its own end, but by focusing on activities that fulfill customers’ expectations whilst continuously eliminating inefficiencies that compromise that delivery. While there may be a relatively low margin business at the core, front-to-back efficiency enables scale and/or scope via massive customer bases or broad capabilities. Operational excellence builds moats that make it difficult for competitors to out-deliver on behalf of customers, and are quite costly to replicate.
Example: Asset management / BlackRock and Vanguard
In asset management, the verdict is in. Historically, main street investors paid handsomely for brokerage and investment advisory. They would hire a salesperson with a couple FINRA licenses to manage their accounts, pay an ad valorem fee for account management, as well as transaction fees to re-allocate the portfolio. Fees were handsome and conflicts of interest were written into the arrangement with customers. Performance lacked. As retirement plans shifted to 401(k) defined contribution plans, investors became more aware of costs. While mutual funds helped customers diversify more effectively and efficiently than single-stock picking, active fund managers clipped 1-2% or more in fees and over time investors could see the mathematically obvious:
half of fund managers are below average, and
most are outperformed over time by their benchmarks, particularly net of fees
Leading up to the 2008 financial crisis, investors tolerated this. Subsequent to the crisis, they had enough and have never looked back. Blackrock and Vanguard have built shock-resistant businesses by being aligned to their customers' greatest needs: transparent performance and value. Few active asset managers have proven over time that they can beat the market, so investors are happy to float with the tide and not get pulled underwater by fees.
While clients have been exiting positions in active funds at traditional brokerages, they have sought refuge in low cost, transparent index funds, accessed either directly by the issuers or via low cost brokerages. In response, traditional fund managers and brokerages (including the low cost brokerages) are consolidating to reduce redundant overhead costs and evaporating revenue.
“Should all active managers survive?” said Kathrin Hamilton, a partner at Baillie Gifford, an Edinburgh-based investment manager. “A lot of firms have been focusing on accumulating assets rather than delivering outcomes for their clients. If there is indeed a shakeout, let’s not assume that’s a bad thing.”
- Asset Managers With $74 Trillion on Brink of Historic Shakeout $ (By Suzy Waite, Annie Massa and Christopher Cannon, August 7, 2019)
Example: Asset Management / Fidelity Contrafund and S&P 500 Index
The same Bloomberg article highlights Fidelity’s rather incongruous experience. Their flagship Contrafund lost considerable share while outperforming its lower cost sister fund, an S&P 500 index tracker, by 39% net of fees over 10 years. That’s an amazing performance, but still the Fidelity Contrafund suffered net outflows equivalent to the net inflows of their own lower-cost S&P 500 index fund. Why? The Contrafund, with fees 10x that of the index fund, can’t deliver what clients now value most after the 2008 financial crisis: low cost, transparency and predictability. As past performance can’t guarantee future returns, investors expect fund performance to revert to the mean, and then underperform with the weight of lofty fees. It’s a reasonable expectation, and difficult to dispute, even with an impressive 10-year track record.
Lessons:
The operationally excellent, low-cost provider is best equipped to survive and thrive in all conditions
Transparency of value for money will attract and retain clients; the business cycle will expose those products and services that fail this test
Inefficient players, in the face of cyclicality, face inwards and not towards their customers. They risk the implications of indiscriminate cost cutting and/or consolidation to reduce overhead, with lasting negative impacts to customers, employees, and partners
Leadership Checklist:
Does your market value and pay for high-cost service inputs (in the above examples, highly-paid asset managers, high-cost service channels, infinite customization or choice)?
Does some of your current or target customer base value a core offering that can be delivered at a low-cost (in the cases above, average performance at low cost)?
Can your business be dialed-in to a simpler service offering aligned to what customers broadly value?
Can higher cost offerings be priced accordingly for those customers willing to pay, as opposed to making all customers subsidize the few who value the bells and whistles?
Working with your ecosystem to answer these questions will position you for a breed of operational excellence that isn’t simply low cost / low margin growth, but rather transparent and scalable, high-performance growth.