The case for digital platforms as a productivity accelerator
As the economy continues to reel from the effects of COVID-19 and its aftermath, consumer packaged goods (CPG) companies’ business operating models are under more pressure than ever. Changes in consumer preferences, competition from existing players, and disruption brought by new ones create challenges on top of dramatically spiking costs. Prices for food and packaging commodities have increased by more than 22 percent, causing margin pressure across CPG categories. Manufacturing wages and labor costs rose in 2020 from 5 percent to 20 percent of total costs as well, due to additional pay and overtime related to COVID-19.
To respond to these rapid, sweeping changes in the marketplace, companies need to be quicker and nimbler in their decision making. Yet many have failed to do what is necessary: transform their operating model to the new reality.
The next wave of productivity from SG&A
Optimizing selling, general, and administrative functions, or SG&A, can be a powerful step toward this goal, especially when considered as a key digital strategy lever. With the right end-to-end approach, these functions can transform from a “cost of doing business” into enablers that help the business manage risk, seize new opportunities, and make smarter strategic and operational decisions. Considering these elements, CPG industry players can expect an EBIT improvement of 2 to 5 percentage points.
To enable this, companies must undertake a holistic enterprise platform transformation to redesign SG&A processes, digitally enable them, and optimize them from end to end to support and enable the overall business strategy. In this model, SG&A functions such as finance, human resources, IT, and other general and administrative services will form a “digital backbone” providing the services that the rest of the business relies on for day-to-day operations. Most of these services would be delivered through self-service interfaces rather than through direct work by SG&A staff. Back-office tasks would be highly automated so that staff can concentrate on value-added activities. This will not only drive efficiencies, but enable more resources to be flexibly reallocated to new, value-adding activities and tasks in an operating model of the future.
Don’t fall into the incrementality trap
In practice though, efforts to digitally transform SG&A functions have often proven disappointing. In fact, nearly 74 percent of such attempts have not delivered their full potential value. But these efforts have been hobbled by one crucial mistake: the companies failed to take an enterprise-wide, end-to-end approach that looked at processes holistically across the business and aligned business and IT on common goals.
Such transformation must go beyond merely stitching together fragmented or inefficient processes with digital connections in order to make this happen. Rather, companies must rebuild their SG&A processes from the ground up, designing them for a digital environment and enabling them to take full advantage of next-generation enterprise software.
The implementation of new enterprise-wide technology platforms—such as the transformation of ERP-based landscapes—can present an ideal opportunity for such optimization. As companies adopt new, enterprise-wide systems, they can target processes that offer the most potential value for redesign, simplification, and standardization when moving onto the new platform, to make the most of out an enterprise solution’s extensive capabilities.
The key to ROI: Transforming SG&A end to end to get a jump on the competition
An enterprise platform transformation of SG&A functions offers a unique opportunity to holistically optimize business processes in a way that will maximize the potential of a company’s technology, improve ROI, and clarify the business requirements for new platforms and IT stacks. In our recommended approach, a company looks at the transformation’s potential value to the business, designs a target operating model, dives into the technological details, and aligns its business and technology to prepare for a transformation roadmap (Exhibit 1).
When companies attempt to transform SG&A, their approaches can vary widely. Some companies take the simplest, IT-oriented approach: implementing new or updated technology. The scope here is relatively narrow. New features, reductions in IT costs via faster processes, fewer clicks, and better data availability deliver minor value in most cases.
A few companies take the transformation a step further by transforming the functional operating model. This approach realizes value by reengineering processes, finding or creating synergies in the operating model, or reducing IT costs.
The recommended approach, however, is to expand the scope further and undertake a full, end-to-end transformation. This approach includes both of the above approaches—implementing new or updated technology and transforming the functional operating model—but goes beyond them to also include aligning the business with technology, which sets the company up to realize maximum value by digitally transforming processes from end to end, rather than focusing on only certain areas of SG&A. This enterprise-wide, process-oriented view allows the company to differentiate itself and improve customer value through optimized SG&A functions like logistics, procurement, and finance. For example, these newly optimized processes could enable “perfect order delivery,” a streamlined product portfolio, and product-oriented organization.
A full, end-to-end transformation that aligns business and technology multiplies the potential value realized by the other approaches. When executed well, it streamlines end-to-end processes, defines procedures for eliminating waste and optimizing effectiveness, drives process standards, incorporates feedback procedures to facilitate improvement, and optimizes exception handling.
How to execute: The Value Model
We recommend executing the proposed end-to-end transformation approach using the V-shaped Value Model, shown in Exhibit 2. This approach begins by taking a high-level view of the transformation’s potential business value and designing a target operating model, while also drilling down into the technology aspects of the transformation: assessing the company’s current technology landscape; aligning the business value, goals, and strategy with the planned technology; and planning a technology roadmap and approach. From there, the company moves up the “V” to again take a higher-level, business-wide view as it examines how the technology fits into end-to-end processes, how all relevant functions will be affected, and how the business’s strategy will be impacted and enabled by holistically optimized processes.
V is for value: Identifying the value and changing the operating model to capture it
The first, most critical step in driving the enterprise platform transformation is identifying and assessing sources of business value. This step involves building a high-level business case and quantifying the transformation’s potential value from an objective, “investor” point of view. Doing this step correctly is essential; if it goes awry, the entire transformation may be jeopardized. Assessing the business value sets the foundation for the entire strategy guiding the transformation.
Quantifying the value requires a hypothesis-driven approach that will quickly uncover the main value levers, such as automation and simplification, which will apply from end to end across the various SG&A functions. Potential improvements that would close the gap between the current and desired operational models should also be identified. The implementation cost—including the technology, new operating model, and end-to-end business changes—must likewise be evaluated. To execute this step, companies can create a detailed list of value levers related to effort, risk, the project roadmap, and other factors to quantify the business impact of an end-to-end transformation.
Once sources of business value have been identified, the target operating model must be planned and designed from the bottom up to take full advantage of digital capabilities from end to end. It should incorporate all business transformation initiatives—including quick wins— and provide guidelines for prioritizing and sequencing them.
To develop the target operating model, companies should identify major pain points and set priorities among all relevant functions. The new model should be guided by key performance indicators that identify, track, and measure value levers and process complexities, risks, and timelines. It should also consider sustainable change management by creating a transformation office, where transformation efforts can be centralized.
Connecting the V: Business and IT working together
Now the organization can begin the process of aligning business and technology in this trans-formation effort by drilling down to the technology architecture needed to enable its new, process-oriented operating model. This starts with assessing the technology landscape of the organization and then planning the technology roadmap and approach.
To assess the technology landscape, companies must look at their transformation’s architecture implications. They must check architectural decisions and platform strategy against best-practice reference architectures, define IT-enablement requirements for the target-state operating model, evaluate the architectural implications of improvement levers, and map those levers’ interdependencies.
To design their new architecture, companies should first determine how their overall business strategy, business processes, and IT teams interlink. Then, they can translate their strategy into optimized business processes facilitated by the new technology.
Next, companies can create a transformation roadmap by defining the requirements for transformation value assurance, aligning the roadmap with the company’s overall strategy. They can then create a high-level rollout and milestone plan while integrating all the business and technology elements, including systems and various software toolchains. Initiatives within the roadmap should be prioritized based on several criteria, including ROI, interdependencies among initiatives, IT budget and capacity, and the respective function owners.
Up the V: Delivering full potential value
Now that business and technology have been aligned, and the technology roadmap has been developed to maximize business value, the implementation roadmap can unfold. Key to the implementation’s success is a commitment to creating value. A complete transformation tool kit will enable value drivers to be executed through internal ownership, targets, detailed execution tracking, and a strict weekly cadence.
The company can pull functional levers and begin to enable its strategy as it implements the new platform. The mistakes of the past—chiefly, failing to take an enterprise-wide view and optimizing processes end to end—have been avoided. A holistic roadmap, in which technology and business support and enable one another to deliver full value, is now possible.
The holistic approach we recommend sets up CPG companies for future success by allowing them to consider the whole value chain of their business as an integrated process network, instead of as siloed SG&A functions. According to McKinsey’s 2021 survey of senior CPG executives, optimizing SG&A is one of the most effective ways to meet targets and tackle current challenges. Indeed, superior SG&A performance has proven to be a strong predictor of success; companies that significantly improve their SG&A spending increase their EBIT margins by two to five percentage points.
The first step toward enterprise platform transformation of SG&A is to conduct an independent due diligence that includes a business diagnostic, a technical assessment, and a transformation design. Once this is achieved, embarking on the path to SG&A transformation in necessary—which, if done well and holistically, will quintuple the potential value realized and set the company up for long-term success in a rapidly changing industry.