The Future for Accountants

The story for accountants the last few years has been increasing levels of outsourcing tasks to low wage environments such as India, and increasing levels of automation for their tasks and their clients. The early stage of that process has been the automation in accounting software systems such as QuickBooks and Mint. Increasingly this automation will move into more and more of the accounting space including real time artificial intelligence auditing systems, automatic preparation of increasing complex tax returns, and structuring credit arrangements.

These things generally start out small and at the less complex end of things and accelerate into more complex areas before people realise it has happened.

So where is the new value for accountants. Primarily this has to be in the process of value creation for clients. Therefore accountants need to move up the value chain and Examples include:

1/ Transformation of business processes around technology changes and the re-training of staff for their SME clients.

As I wrote in Questions on the Future of Work a recent McKinsey report has stated that

According to our analysis, fewer than 5 percent of occupations can be entirely automated using current technology. However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated”

This supports the notion that apart from a few isolated cases (e.g. truck drivers with driverless trucks) technology does not replace jobs but replaces particular skills or tasks. More importantly business processes and the ways in which we serve customers are changed by the introduction of various forms of artificial intelligence into technologies. This can be a customised approach for vendors like Salesforce Einstein which is adding AI services to its sales, and customer service offerings at around US$50 to US$75 per user per month. Or it can be more fundamental changes to value propositions and business models and the underlying capabilities required to deliver them.

Either way we appear to be entering an era where the jobs people will do will change even more rapidly than they have over the last 10 years and will constantly change rather than be part of a single change management process. In my experience most organisations with under 1,000 employees have little idea on how to approach this problem. This is a huge opportunity for accountants who already have close contact with their clients.

2/ Assisting clients with understanding their strategic landscape

In a world that is moving faster and changing more rapidly than ever before operators of SME businesses are facing greater uncertainty than ever before. They are also facing a paradox. The pressure on them means that they must spend more time focusing on the operational matters in their business but they are doing so right at the time that looking around to see what is happening becomes more important. Just last week I was working with an SME business that is very well run and focused on all the right things that need to be done for the next 12 months. At the same time they were not thinking very deeply about the future and that their decisions (that were absolutely correct in a short term sense) might mean for their long term future.

This means that there is great value for an independent adviser that sees a wide range of other businesses and can:

  • Provide a better strategic understanding of the industry in which the client business operates. Examples include looking at possible industry scenarios for 5 years time and trying to understand what the interim competitive position might be.
  • Cross pollinate ideas and ways of doing things from other businesses in other business sectors. Sometimes very simple tools and approaches from somewhere else can significantly improve a businesses bottom line.
  • Look at the business from a dispassionate but involved perspective and ask questions the business is not asking itself. Examples might include – does your logical short term investment in cost improvements weaken your balance sheet and capacity to respond to x/y or z which are significant risks?  OR What custom built systems are you using which can be supplied via industry standard products or new utility services.
  • Run a structured red team/blue team process to attacking and defending the business from an outside perspective.

 

3/ In the future: utilisation of AI to augment their own capabilities

The reality of artificial intelligence is narrow expertise systems rather than a general intelligence. So we will see artificial intelligence systems that can aid sales people and customer service people but cannot do other things (see Einstein above). We will see narrow artificial intelligence systems that can assist doctors but not do much else. The list goes on.

The modern approach to artificial intelligence systems is basically on of machine learning which requires large training data sets and a large market to justify to expenditure on development and training. Therefore we will see AI systems developing in markets where there are either a lot of customers, or high margin customers, or both. Given how many accounting practices there are around the world the accountancy business is one that is ripe for such a development.

Veterinary Schools as a Platform (VSaaP)

Late last year we worked with the Australian Veterinary Board Council and the Deans of all the Veterinary Schools in Australia and New Zealand looking at what the future of veterinary education and regulation might look like in 2031.  The date was chosen to be the time when a 12 year old just starting secondary school now would be a graduate of 2-3 years standing. We looked at a whole range of issues including availability of smart phone based diagnostic kits for pet owners, artificial intelligence systems for diagnosis, urban densification and its effects on pet ownership, veterinary practice corporatisation, international trade requirements, and the need for wide or narrow scope veterinary degrees.

One of the ideas that emerged from the process has stuck in my head and I think has great scope to revolutionise how we provide a much wider range of education at universities and for education post graduation.

Essentially the is one where  the veterinary school acts as the primary site of education for those subject areas that need face to face contact and technical expertise that cannot be achieved in an online, video, or virtual reality environment.

All other subjects/modules are accessed by the students via the school platform and the teaching material and processes that form the basis of those modules can be supplied by any accredited service across the globe. The model looks like the following diagram if we just look at one module, in this case cat medicine at the vet school at the University of Melbourne:

Vet school as a platform image

On the supply side of the platform (above the line in the diagram) cat medicine courses are supplied by all the possible services globally that wish to provide that service and who are able to meet the curriculum needs.  The platform would be agnostic on delivery systems as long as outcomes where met.

On the demand side (below the line in this diagram) each student in this model can choose who their supplier of education in cat medicine is. In the picture above Isabelle has chosen Sydney University because they have a great reputation but also provide face to face services at the school in Melbourne. Ivy and Anne have chosen Seoul National University because they have a great reputation and their virtual reality applications suit their learning style and they have been offered lifetime professional development at a low cost as part of  the deal.

The school accredits multiple providers from interstate and/or overseas for each module (the school itself can provide modules in competition with these modules if it desires). Students can choose the best provider for the module or subject they wish to complete.

Competition on the platform fosters innovation in teaching content, support and methodologies that best meet the student’s needs.

Collaboration may occur between schools with centres of excellence formed to compete with international providers. E.g. Sydney University could be the cat medicine centre of excellence that allows economies of scale to be achieve on content creation and methodologies (for example virtual reality technology is still quite expensive but spread over 1000 students the costs come down).

Uncertainty about the future education and information needs is dealt with by the system working as “plug and play” with new subject matter being able to be added as flexibly as possible, and many providers producing a much larger resource base. This should allow more rapid adoption of new content as the world changes (e.g. big data systems/network facilitation for clients with home diagnostic tests).

On top of the pre-registration process it could also be used for post registration professional development with or without limited degrees. Currently vets have to learn and qualify across a massive range of animal species but many go into small animal practice and never see a cow, sheep, or pig again. Shorter narrow species based degrees could be supplemented by post graduation systems that allow vets to qualify in other areas if they wish to change careers or specialties.

By taking advantage of education technologies to improve the efficiency and quality of education a school as a platform system. There are multiple advantages to this beyond what has been discussed above:

  • The time and costs of delivering some content can be reduced.
  • Greater value can be created in other areas by increasing the time and resources applied to the teaching of those areas.
  • Self paced degree systems could be put in place where the pace of learning is determined by the student rather than the needs of the lecturers or the school.

Regulatory/Accreditation issues could be relatively straightforward if the existing schools are accredited and the content partners are required to meet content and/or competency based assessments. Combined with limited degrees, intern models, etc. the issues can become quite complex. The accreditation process itself may need to become more flexible and capable of responding faster to changes in technology.

Technology in delivery of course and maximising flexibility in systems is rapidly advancing. For example the University of Texas has a major collaborative project going on with Salesforce:

UT System partners with tech industry leader to develop next-generation learning platform

The future is coming faster than we think and it has the potential to radically change education models.

 

Questions on the Future of Work

Mckinsey has released a long awaited (by me anyway) report on the future of work entitled A Future that Works: Automation, Employment, and Productivity. It is a very interesting look at the technologies which are affecting the future of human work. Every business and organisation should read it in full.

Mckinsey takes a distinctly different approach than the much discussed Frey and Osbourne Oxford report on the susceptibility of jobs to computerisation.

This difference can be best seen in the following graphic from the report:

mckinsey-work-report-2017-exhibit-e1-18-separate-activities-mapped

Instead of looking at what jobs might be replaced the team at Mckinsey have examined all the activities that each job in the USA job market entails and then looked at the various capabilities for each of those activities. They have then mapped those activities against the possible timelines of those activities being able to be performed by technology.

This is important because except for very limited cases technology replaces activities rather than whole jobs.

From this approach Mckinsey have created various forecasts for both the types of activities and the sectors of the economy as shown in the next graphic which shows their view about the ability to automate those activities.

mckinsey-work-report-2017-exhibit-e4-different-sectors-mapped

Taken in aggregate their predictions are shown in the next graphic which I have annotated

mckinsey-work-report-2017-exhibit-e6-adoption-scenarios-annotated

RED: Their median forecast that 50% of all current activities will be replaced by 2055

BLACK: The rapid adoption forecast that 50% of all activities will be replaced by 2035 (only 18 years away)

GREEN – The extrapolation of the rapid adoption forecast from 2035 that shows that over 90% of current activities will be replaced by 2055.

Mckinsey also states that:

 “According to our analysis, fewer than 5 percent of occupations can be entirely automated using current technology. However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated”

Apart from praising Mckinsey (which I do not normally do) for creating such detailed and interesting work, and also in highlighting the inherent uncertainty in any forecast, this raises several interesting questions in terms of impacts and change.

 

From an organisational perspective those questions include::

  1. Setting aside the changes the technology makes to our business models and speed of doing business if 20-50% of activities are going to be replaced over the next 18 years how are we going to lead our people through the continual change that is going to be required? If the average is 50% then many people will have far more of their activities replaced.
  2. If technology takes over more and more of non-routine activities in our organisation what are the skills we are going to need?
  3. If technology pushes people out of the lower skilled activities in the whole economy how many people in the whole community are capable of carrying out the higher skilled activities we will need our people to concentrate on? Will we be in an even fiercer fight to recruit the people we need?

An article in the New York Times on January 30th 2017 describes When the German engineering company Siemens Energy opened a gas turbine production plant in Charlotte, North Carolina:

some 10,000 people showed up at a job fair for 800 positions. But fewer than 15 percent of the applicants were able to pass a reading, writing and math screening test geared toward a ninth-grade education

Eric Spiegel, who recently retired as president and chief executive of Siemens U.S.A. said “People on the plant floor need to be much more skilled than they were in the past. There are no jobs for high school graduates at Siemens today.”

From a societal point of view this raises questions of:

  1. Are we heading into a period of increasing structural unemployment?
  2. How will we design an education/learning system which gives your young people the skills they need to work in the changed economy and our post school/university people the capacity to re-skill?
  3. If education is changing to be more focused on re-skilling people for jobs how do we still supply the wider general benefits of education?

Part of the answer to the second question is contained in the New York Times article where it describes the companies getting heavily involved in educating and training people with guaranteed jobs at the end of the cycle, and just as importantly no student loan debt. This was mirrored in my conversation in a trip to Austin Texas last year. Austin is growing at an enormous rate and part of the reason is that some of the major tech companies have realised that if they do not get involved with students before they graduate they may never get to hire them. So they are moving major parts of their operations closer to the Universities with strong reputations in the skills they need. University of Texas Austin happens to be one of those. Students are becoming heavily involved and supported by the companies.

When I work with clients on these issues they should be focused on the effects on their business or their organisation but the conversation always turns to the wider implications for society.

The techno-optimist argument is that technology has been destroying human jobs for hundreds of years and we have always created new ones. That is partly because we have created new capabilities that need people, but also because we have reduced the costs of inputs to make otherwise uneconomic business models viable. Mckinsey argues in their report that their median forecast results in job losses that have already been experienced in society as we reduced the human employment levels in agriculture, and then again in manufacturing. This is true if the pace remains the same.

On top of that they argue that the productivity improvements are required because we are losing the huge contribution that population growth rates have contributed to economic growth over the last 100 years. That is a good argument.

It is a brave futurist who says this time is different and it is completely plausible that the combination of new jobs being created, and the demographic change we are experiencing, particularly in developed economies will mean that we will still have close to full employment. It is also plausible that:

  • The pace of change will be at the rate that fulfills the rapid adoption scenario that Mckinsey has envisaged, increasing the rate of job losses above previous experience.
  • That as technology pushes people out of a whole range of human capability jobs we will find that a significant minority of people do not have the ability to carry out the jobs that are created.
  • That a significant group of people that have the abilities will be left behind because they cannot gain the skills required to harness those abilities.
  • That the combination of the two groups will either have to work for very low wages in order to not be replaced by technology or be permanently unemployed.

That is a recipe for societal unrest way beyond what we have seen in the rise of Donald Trump and Marie Le Pen. If the political response to the issues of the people that have expressed their frustration at the current system is to promise a greater share of the benefits of the economy and a genuine attempt to do that is derailed because of technology changes we could be in for a very bumpy ride indeed.

 

 

 

 

Are The Two Major Supermarkets in Australia Doomed?

Yes but it will be a slow train crash

Following stories in the Australian Financial Review and News Limited last week (Amazon delays Australian launch to September to include fresh goods and Amazon to ‘destroy’ Aussie retail ) I decided to complete this analysis which has been kicking around in draft form on my system for a few weeks.

It is not just Amazon that is the problem. A combination of threats on margin, volume, and customer traffic is threatening the existing business model of the major supermarkets. Not all have to be successful for there to be major effects. To understand how that is happening we need to understand the business model.

A long time ago I tried to get ex Woolworths Chief Executive Paul Simons to come on board to market Australian Pork by becoming Chairman of the Australian Pork Corporation. That bid failed but something he told me about the supermarket business when we met has always stuck in my mind. Paul told me that there were five things that attracted people into supermarkets and while they were there they bought a heap of other stuff. Those five things were discounted bacon, Coca Cola, Pal Dog Food, fresh meat and fresh vegetables. A quick look at the Woolworths weekly specials catalogue for Victoria for the week starting August 31st (when I first started putting together this article) shows discount bacon, a discounted leg of lamb and a discounted whole duck front and centre on the first page. That is followed by  a full page spread on fridge mate packs featuring Coca Cola and two full pages of double points on fresh fruit and veg.

woolworth special august 31 2016

Source: Woolworths

 

Given that was the early nineties we could probably add rotisserie chickens, specialty pet foods, Huggies, petrol vouchers, and reward points to the list. That does not change the point that there are major group of items that get us in the shop and we buy other stuff when we are there. We certainly might buy half price Edgell Red Kidney Beans when we are there over another brand or product because they are on special but it is not going to get us in the door.

Later I chaired a board where a senior executive of one of the major supermarkets was also a board member. He told me that the supermarkets did not make money out of selling things. Their main two sources of income were the cash difference between when customers paid and when suppliers got paid and selling prominent shelf space to suppliers. While the story is illustrative of the business model rather than a statement of fact it does help understand the model.

If we look at the cash from customers as a source of of revenue then inventory turnover is important. The faster the inventory turnover the more money the supermarkets get in before they have to pay their suppliers.There are various numbers available for supermarket inventory turnover rates. The Inland Revenue Department of New Zealand reports median turnover of 14 times with a range of 10-19 for large supermarkets and grocery stores). The ratio of sales to inventory in the Woolworths annual reports 2011-2015 vary from 12.46 to 14.81 although these are affected by their non supermarket sales. Because this is not an investment analysis I think that it is safe to assume that the inventory turnover for Woolworths and Coles supermarket business would be at the higher level of the IRD estimates. If we use 16 x turnover that is equal to turning over inventory every 22.8 days. If the average payment terms to suppliers is 90 days (personal experience) that means that on average the supermarkets have customer cash for 67 days before they have to pay suppliers. With daily sales of  Australian Food and Liquor of $115.4m that is a whole lot of cash in the bank. Of course lower interest rates will have damaged the revenue the supermarkets receive form having that cash on hand.

When we look at paying for products to be on shelves and supplier rebates it was reported in The economist last year that In Australia supplier rebates had boosted margins for the major supermarkets by 2.5% point to 5.7% over the past five years (Buying up the shelves)

The other part of the business model puzzle is that the supermarket business is generally a low margin business once all costs are taken into account, although margins in the Australian market have been higher than the rest of the developed world. The Woolworths five year financial summary  to 2015 shows that margins for the Australian Food, Liquor and Petrol operations have been between 6.63% and 7.20% before interest and tax. While this is generally a low margin for businesses it is 30-42% higher than the margins in the Woolworths New Zealand supermarkets in the same report.The margin before interest and tax for 2016 fell dramatically to 4.43% as Woolworths lowered prices to compete with Coles and Aldi. The margins before interest and tax for Coles supermarkets in 2016 and 2015 were 4.73% and 4.67% respectively ( http://www.wesfarmers.com.au/docs/default-source/Quick-guides/2016-full-year-results-shareholder-quick-guide.pdf?sfvrsn=2).

While this net margin is quite low the gross margin is much higher For example the gross margin for Woolworths was 25.37% and 26.19% for 2016 and 2015 respectively ( Woolworths Financial Reports (pdf )) .

The gross margin is essentially sales minus the costs of purchasing goods for sale. This means that the difference between gross margin and net margin is all the other costs such as property leases, energy, staff, etc. This is a critical point because it means that the contribution to profit of the last customer or the extra sale is much higher than the average across the business. What this means is that if I drive down the road and turn left to shop at Woolworths or turn right to shop at Coles the loss in sales to the one I do not choose is very high. Whether I turn right or left both those businesses still have to pay their staff, pay their energy bills, pay their property leases, etc. That means that if roughly 18% of customers disappear and they cannot adjust their costs then their profit disappears, and adjusting high fixed costs like leases, staff and energy is very difficult.

The same applies to sales volumes. If the same amount of customers go through the door but buy 18% less in volume the supermarkets do not make 20% less profit, they make virtually nothing if the same costs structure remains in place.

So the supermarkets run a high turnover, low margin, high fixed cost business where they make lots of money on inventory turnover and payments/rebates from suppliers. This gives is the basis to look at their strategic future. Attacks to their profitability can come from primarily three points:

  1. Lower margin business forcing them to reduce margins as Woolworths has done in 2016 to combat the threat of Coles and Aldi in particular. This may be extended further in a major Amazon push into fresh produce.
  2. Customers being drained away so the high costs structure causes problems for profitability.
  3. Customer numbers staying the same but buying less every time they go to the supermarket.

Lets look at each of those individually:

Customer numbers staying the same but buying less every time they go to the supermarket.

This is the most serious threat to the long term viability of the supermarket businesses. The threat is analogous to guerrilla warfare or asymmetric warfare. Only some of the attacks need to be successful for the supermarkets to be in trouble. People will still go to the supermarket but there purchases will be reduced.There have been lots of efforts to look at direct delivery models with varying success but we are now reaching the point where multiple models are developing that have a good chance of being successful. This is devastating for the supermarkets because if 40% of people reduce their purchases by 30% that is a 12% reduction in  overall sales. But the supermarkets will still have to operate their existing business model to retain the other 60%of customers  as well as to be able to retain the people that have reduced their purchases but are still coming into the store. Lets look at some of their threats:

Dollar Shaver Club

dollar-shaver-club

These guys run a direct delivery service for razors direct to your door. They combine an irreverent marketing attitude with social marketing that gives you free blades if you recommend a friend.  They promise to reduce your costs of shaving and take all the friction out of the process. I don’t use a razor any more as I use clippers to manage my George Clooney like designer stubble, but if I did use razor I would sign up today – no longer buying that product from the supermarket. A small individual purchase perhaps but they start to add up.

Blue Apron

blue-apron

Blue Apron promotes direct delivery of all the ingredients you need to prepare a healthy great tasting meal. I met with one of the Nokia trends scouts in Austin Texas a few weeks ago and she is an avid fan. As Blue Apron delivers the exact amount she needs to make a meal there is no waste and she said that the service is not costing her any more money than shopping for the ingredients. It is estimated that Australians throw away about $8 billion dollars of food a year (fact checked by the ABC) so certainly there is a cost saving there. While they are not yet in Australia the business model is one that is easily transferable here.

Youfoodz

youfoodz

Youfoodz is a company that will deliver a week’s worth of fresh (non frozen) meals direct to your door in Australia. You can choose all meals or a proportion of meals and snacks. I have done a cost comparison on their service and while they are slightly more expensive than making your own food for quality meals the difference is not large. Again there is no waste and for the time poor there is no shopping or preparation to be done. For people working long hours or running their own businesses where more time means more money this is a very viable alternative.

Amazon Dash

amazon-dash-button-washing-machineAmazon Dash is a programmable button that you can put in your house. The example here is one of putting one on your washing machine so that when you run out of washing powder you just push the button and washing powder is delivered into your house. It takes all the friction out of buying and I imagine them building in services integrated with Alexa (the interactive home system) so that rather than just buying your normal brand the system can queue up order requests and talk to you about special offers, etc at your convenience. Once adoption gets high enough then Amazon can use its considerable logistics and information system to package up multiple orders, supply weekly orders based on your usage, and give you special offers.  It has not really caught on yet but the system is adding more and more brands and Amazon is pushing it out to more countries (Amazon triples Dash Button brand lineup, orders surge 75% in Q1  andAmazon brings its Dash buttons to the UK, Germany and Austria for ordering staples with one touch). It has the smell of a long term strategy to harness all of their capabilities into an offering that makes sense, especially for dry goods.

So if we think of an example household of an above average income couple (the most attractive customer) that are busy with work or their own business you can imagine a combination of all of these services. They use a service like Youfoodz to have a couple of meals pre-supplied on their two busiest days of the week when a combination of work and commitments for kids activities have them stretched. They use a service like Blue Apron once a fortnight for a lunch or a dinner where they want to cook but want to eat healthy and not think about recipes or shopping. They use Dollar Shave Club for monthly supplies of razors. They install Amazon Dash buttons for washing powder, toilet paper, paper towels, dish washing liquid, and cereal and it all gets delivered. Gradually Amazon influences them through their Alexa to buy more dry goods because the marginal cost of freight is so low the system is cheaper. Convenient and lower cost is a killer combination.

They still go to the supermarket they always went to but slowly but surely the amount they buy there until it is down to 50%. Some families at that level then start questioning the trip to the supermarket and start changing their total shopping habits.

The problem with all this from the major supermarkets point of view is that they don’t really have a strategic response that makes sense because of their legacy model. They cannot abandon the majority of their customers so their model stays the same and their margins get steadily eroded.

If they reduce stock lines then they slide more towards an Aldi/Costco model and they don’t want to go there. If they move to more and more online systems they can sort of compete but they still have to supply their standard customers and that model is based on big stores based in solid catchment areas. If they close one of them or move to a small store model a lot of customers probably end up with their competitor who did not close. So neither wants to be the first to do that. It is a little like the banking branch model problem. Less and less transaction are being carried out in branches but people will not travel far to conduct those less frequent transactions so banks keep branches open for fear of losing customers.

At every step of the way their business model is eroded:

  • Lower customer traffic/less spend per customer reduces cash held in the money market.
  • Lower customer traffic/less spend per customer erodes margins as there are less customers/customer dollars to spread non cost of goods costs over.
  • Lower customer traffic erodes the capacity they have to charge for shelf space. It is a bit like television advertising rates. If you have less eyeballs watching your shows you cannot charge as much for advertising.

The final straw in this nightmare scenario for the major supermarkets may be Amazon moving its vision to applying its impressive logistics and intelligence systems to support a national network of independent specialty shops. This is where the high margin customer of the future, who has already reduced their supermarket purchases as described above, may be headed. If that is the case then the major supermarkets are caught trapped in a legacy business model they cannot get out of and assailed on all sides.

Only 5% of each attack has to be successful. No-one has to destroy them.

Tim Tams and the Social v Messaging Battle

A few weeks ago I did a presentation for the managers of a major global food manufacturing business on digital tools and what they might mean for their business. One of the major topics for discussion was using digital tools to connect to the consumer in order to try and level the playing field between food suppliers and the major supermarkets.

I was watching the ABC news here in Australia last night and there was a story about that iconic Australian biscuit the Tim Tam being pulled from the shelves at the major supermarket Coles because the supermarket was refusing to pay a higher price.

tim_tams

source: wikipedia

The story is a microcosm of the one that is being played out across the spectrum of products in Australian supermarkets and is now moving into new territory. You can see more detail on the story at:

Coles pulls Tim Tams from shelves as Arnotts price war goes public

In the end Coles relented because there is so much demand for Tim Tams. There are only a handful of products that can afford to go head to head with the major supermarkets in Australia because their hold in the mind of the consumer is so strong. Tim Tams is one, Coca Cola is another, Huggies nappies and Pal dog food are on the list. The rest are in a perpetual battle on price and shelf space where the supermarkets hold the whip hand because they control the gateway to the consumer.

The supermarkets hold that gateway and also now hold masses of data connected to loyalty cards and credit cards so they have a a continual view of what is working and what is not. The standard way of the suppliers to gain a greater foothold has been branding and marketing campaigns that try and catch the mind of the consumer.

Over the last few years social media has been the added tool that many have used to try and capture the hearts and minds of the consumer. That does not always work as evidenced by the disastrous taxi social media campaign (#YourTaxi campaign backfires as passengers share horror stories) here in Melbourne:

@yourtaxis Every single woman I know has, at some point, been sexually/verbally abused by a cabbie & now every single woman I know uses uber

.@yourtaxis Got kidnapped by a driver who wanted me to pay more than was on the meter. Had to call police to pull us over.

.@yourtaxis last time I caught a taxi he had no idea where he was going and stayed on his mobile the whole time. Uber from now on

Good and bad news is that messaging apps like Facebook Messenger and WeChat are moving heavily into this space as described in this great Wired article Facebook Messenger: inside Mark Zuckerberg’s app for everything .

Essentially Messenger seems to be trying to emulate the WeChat model of putting services inside the app like payment systems, airline bookings, etc in order to keep users inside the app and therefore in their ecosystem rather than elsewhere in the mobile or internet ecosystem. This is both good news and bad news for suppliers to supermarkets. The good news is that the way the apps are configured is creating a much closer one to one relationship with a wider range of customers rather than just communicating with “fans” on social media. The bad news is that if they go down this route then they will be swapping one gateway controller for a different one.

Now the supply of supermarket items is much different than the supply of airline booking services as described in the Wired article. Suppliers can think about product changes or they can reconfigure the delivery system.  In my next post I will put forward some ideas on how that might happen.

You can read that at:

Beans, Uber and the Post Office

 

 

 

What Happens When all the Friction has Gone?

The quick answer of course is that you slide right off.

friction sole-115156_640

I am fascinated by the continuing questions of what is the collective result of us making logical individual decisions that make economic sense. Adam Smith of course would say that this is the invisible hand of the market where we all benefit from everyone acting in their own self interest.

I am constantly telling clients and conference attendees that they need to remove the friction in relation to their interaction with customers and stakeholders. Through our level of connectedness and the developments in mobile technology we are training a generation of people that they can get what they want now. Want to be reading a book? Search on Amazon and it can be on your reading device before you board the plane. Want a TV show, click on your Netflix app, want to reach someone call them on their mobile. The list goes on and on.

Friction is anything that gets in their way about the capacity to do something, and especially if they have made a decision to act rather than just browsing. This is both a customer retention strategy and a talent retention strategy. If inside your organisation people cannot get the same level of capacity to do stuff they can in their daily lives they are less likely to stay.

It is  a clear economic benefit to reduce friction and increase the likelihood that someone will buy your products or services or will stay with your organisation. There are clear first mover advantages but the question is what happens when we have all done it and response time is down to milliseconds.

My thinking on this today was prompted by an article in MIT Technology Review:

Buy buttons are coming to Pinterest and will reinvent online commerce, the company claims.

The article describes the possibility of you seeing a recipe on Pinterest that you like and the capacity for you to click on a buy button that will buy the ingredients on Instacart which has a one hour delivery service. That theoretically means if you feel like it you can scan for recipes on your train trip home, click on the buy button and have the ingredients delivered for you to make dinner. This all makes sense from an logical economic part from Pinterest who will obviously make a cut for that transaction. If you see the recipe and leave the site without making a buy decision they get nothing. There are a number of other implications to this as well:

  • It is likely to be higher margin business for both Pinterest and Instacart (and other providers that participate) because your purchase is partly an impulse buy and you are not comparing prices.
  • It is aimed at the time poor consumer as much as anybody. You may have planned to shop on the way home but a late client call or an unexpected meeting with your boss had delayed you so this service provides a way for you to deal with this problem.
  • It means that the competition to attract and retain platform users for this sort of business is likely to get even more brutal. Accessing those high margin customers who may contribute 80% of your net profit will be vital.
  • Tracking and data profiling of the customers will become even more important and probably more invasive.

More and more organisation are going to be heading down this path in order to reduce any barriers for their customers.

So back to my original question.

Once everyone has removed every possible friction with customers it ceases to be a key competitive advantage. In my work with clients on business models we differentiate between survive competencies and thrive competencies. The survive competencies are the ones that you need to have just to play in the game. Thrive competences are the ones that will grow your organisation and its success. Over time many thrive competencies transfer into the survive category. A sort of commoditisation process. My work is partly about helping people think what the future will look like so they can refine their strategy and allocate resources. Lack of friction will no longer differentiate you in the future.

So what should you do:

  • First of all by all means continue to work on removing friction. It will give you short term advantage the faster you do it and you will need it just to survive in the future.
  • Think through the sorts of organisations and platforms that are likely to capture the attention of your high margin customers or your key stakeholders. You will need to figure out how to maximise your presence there while minimising your dependence on them. If you give up your key contact to the customer to someone else you are handing over power. If you have arrangements with them like Instacart might have with Pinterest make sure that you are in a position to collect customer data.
  • Think through how you support and maintain contact with those customers who are the ones that will promote your business and recommend your product. You may even want to support them establishing profiles on sites like Pinterest.
  • Concentrate on the one enduring competency. Delighting the customer. Removing friction will help that but in the end it is the experience that the customer (in the widest possible sense of the word) has with your product or service that counts.

Tell me what you think

Paul Higgns

Major Disruptors of the Next Decade Section 3 – The Uber Pivot

This is part of a larger series on major disruptors. You can see the previous post in the series at:

Major Disruptors Section 2

The posts so far have focused on both the gains to be made from driverless car technology and the disruptive effects of that technology on various industries and landscapes. The next post was supposed to be on opportunities from driverless cars rather that disruptions. That post will be along soon but meanwhile lots of people have been asking me about the Uber business model in relation to driverless cars.

Uber has worked by displacing the taxi industry to a certain extent by harnessing unused capacity in vehicles in our communities but also by bypassing regulation and maximising the use of application and location technology. Given that the company has been valued at US$18 billion according to its latest funding round, (Taxi app Uber valued at $18 billion in new funding round) and my view that driverless car technology might be fully implementable in 10 years the question has been how does the company valuation make sense when the model is likely to be completely wiped out?

Firstly I think that the business model does have some short to medium structural problems. It is highly possible that the taxi/driver based car system is the one that will be initially replaced in the implementation of driverless cars. If this becomes clear then I think that Uber will have trouble retaining drivers and gaining new drivers in the transition period before the implementation period becomes practical. Who is going to invest in a vehicle or throw in their job, or turn down a job if they are likely to be replaced in one or two years. This is is similar to the problem that the car manufacturing industry will have close to a full scale implementation that I mentioned in my initial post.

The second issue is one that a lot of companies are facing right now and more will in the future. In a world that is changing more rapidly and where disruptive business models or technologies can turn up from anywhere how do you maintain a strategy and a profitable business model that has longevity? Market valuations are supposedly based on the forward view of cash flows (market irrationality aside). In a world where you business model only lasts for 10 years or less how do you maintain a valuation, especially if those cash flows are negative while you rapidly expand? The only way that Uber can do this is a long term vision of pivoting their business model significantly and that model has to be one of being a significant player in driverless car models. In the meantime they have to maintain a profitable or funded model that makes sense to people. In the longer term the game has to be one of using that platform to accrue a huge amount of data and expertise around customers and their travel requirements. It may seem crazy to have a 10 year plan to expand to hundreds of cities just to create a new business in the future but that is what is necessary in these times for lots of businesses. To me it is the only way that the current valuation makes sense.

 

What is your business model/strategy to deal with these sorts of issues given that as Gary Hamel has said “somewhere someone is making a bullet with your business’ name on it”.