Show 104 – Addressing The UK Productivity Gap
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The third episode produced in partnership with SAP UK that we originally planned to record at their Innovation X conference in March. However, due to the coronavirus, all our interviews took place online.
This episode looks at addressing the UK Productivity Gap
- Simon Carpenter, Head of SAP UK Centres of Expertise at SAP UK sets the scene explaining how companies are using SAP’s S/4HANA
- Maria Parpou, Chief Product Officer at Barclaycard Payments chats about new automatic payment systems and how they are becoming more important in society
- Ben McGrail, Managing Director for the SNP Group in the UK shares examples of S/4HANA in use
Simon began by explaining that if we look at Western economies over the last couple of decades, in fact going back to the 70s, productivity and advanced economies, generally speaking, has been declining with the rate of productivity growth also declining. He said that if you take it from a big economic standpoint, it is a real challenge because productivity is the key to economic progress. It’s how we get more out of the resources we have, how governments get to be able to invest in infrastructure and from an organizational point of view, it’s how organisations deliver effectively a return to their shareholders and have the funding available to be able to innovate and keep growing their organisations. So fundamentally, productivity is a really important aspect. Simon explained that whether you’re looking at it from a company perspective or a country perspective, if you look at how we measure organisations, in terms of the key levers we look at, is this organisation growing from a revenue point of view and a market share point of view? Is it profitable? Is it getting a good return on its assets and is it making the right sort of strategic decisions? Productivity, in one way or other touches all of those. For example, your return on capital employed effectively measures how well you’re employing the assets of the organization to create revenue. Likewise, profitability is a measure really of how much you are selling and how much resource you’re using to do that selling.
Simon said that he believes it is worth looking very quickly at the history of ERP to understand how things are changing. He said that at SAP, they started off really just trying to record what was happening in the organisation, with a balance sheet and a profit and loss account that are the ultimate measurements or repositories of knowledge about the organisation, as far as a shareholder is concerned. The early systems were all about measuring the revenues they were producing, the costs they were incurring, how that translated into the bottom line and what that meant in terms of the structure of the balance sheet. He went on to say that what we saw emerge in the mid to late 1990s was a big focus on business process re-engineering. Organisations needed to stop thinking about their businesses as silos and functions and start thinking about them as business processes, in so doing, we saw this realization that systems of record weren’t up to the job, because quite often what you found in those days was each department or function had a separate system of records. ERP then emerged onto the stage as a way of bringing together all these separate systems of record into one data model, that allowed the entire organization to do something once and see the outcome of that transaction across all of the various departments that are involved in a business process. But it was still very much about recording what was happening and doing so in a way that made the support for process a little bit more effective and efficient. According to Simon, what’s changing right now is the rapid emergence of artificial intelligence in its various different flavours, because this will now allow us to take business processes and automate them in ways we’ve never been able to do before, which will unlock massive productivity gains because people who’ve been doing highly repetitive work will now be unleashed to do more valuable things for the organisation and those repetitive tasks to which we have previously being applied expensive human resources can now be automated by an algorithm that runs 24/7.
Simon explained that one of the first applications they put on the market was something called SAP Cash Application. They wanted to be able to automate the process of matching the receivables in the debtor’s ledger to the payments that are flying into the bank accounts. Typically, today that’s done by a fleet of people in an organization in the debtor’s department who are very painstakingly going through the bank statements and trying to match the payments to the line items in the ledger, many organisations have applied robotic process automation to do that. It’s one way of improving productivity, but, according to Simon, that’s based on a fairly static set of rules and it’s not a self-learning type of environment as we’re able to provide with machine learning. So unless you are continually revisiting those rules and they can become more and more complex as you do that, it’s difficult to get the ultimate expression of productivity by taking machine learning and building an algorithm that learns from the history that you already have in your system as to how you match those line items previously. SAP have one large customer in the chemical industry that took the automation of their line item matching from 70 percent roughly with a robotic process automation system to over 90 with this machine learning application. They also have a company in the food and beverage industry that’s managing its accounts receivable across about 130 countries and they were one of the early adopters of this application as well. Today, they’re automating the processing of about 30,000 postings a month. And one of the things that they’ve commented on which Simon thinks is important, is that the users in accounts receivable like this application. This is important because you often hear people exhibiting some kind of fear that machine learning and other kinds of artificial intelligence are going to come along and take our jobs away, but what these users are finding out is that it actually relieves them to go and do stuff that’s more valuable, like actually getting on the phone and following up with a customer around an unpaid invoice or building a relationship with the accounts payable clerk in the customer. That’s more human and uniquely human rather than going through a spreadsheet type of exercise.
Simon said that there is going to be some interesting impacts of Coronavirus on business and on life in general. This may prove to be the inflection point that really ramps digital transformation up into high gear because it’s forcing us to work in a different way and that’s quite an important element to think about. Simon gave the example of the adoption of electric motors in the manufacturing environment. He said that electric motors are a vastly more flexible way of powering production equipment because they can be moved around and situated exactly where they are needed, which is very different to the way steam powered factories used to be laid out. He continued, you had the steam engine, a drive shaft coming off it that typically ran all the way through maybe with a few gearboxes on it and belts dropping down to drive the individual pieces of equipment. It was a very static production model. Electric motors did away with all that. So, as we saw that shift, it obviously came with a lot of other advantages; a more flexible layout, they were cleaner, they could be spooled up and turned off very quickly, unlike a big steam boiler. But it still took around 50 years for electric motors to become widespread in manufacturing. The reason for that is not just that companies get stuck in the sunk cost fallacy and think, ‘well, we’ve invested all of this money in steam, we need to get the best out of it, even though there may be a significantly better way of doing things that are already available’, but it’s also the mindsets, the culture and the way you organised work. All of these things need to change in order to get the best out of new technologies like artificial intelligence in its various different guises. This upheaval that we’re going through right now is going to provide an inflection point for a lot of leadership and managers to think differently about how they do work and who does the work. Simon added that we’re likely to see more rapid change going forward.
If you look at what SAP are trying to do with S/4HANA, which is a complete recasting of what an ERP system is all about. Firstly, they have moved away from the notion of this just being a system of record to this now being a system of action, because they’re able to embed these very smart algorithms into the business processes so that they become self-tuning and self-learning. Therefore, SAP can offer much higher levels of automation while people get on and do the more-high value tasks. The second thing is it’s built on a new in-memory compute platform. What that also means then is SAP no longer have a separation as they did have back in the day when systems were built solely on disks. Simon said that they had to separate transactions from analytics because they couldn’t get enough performance out of a disk to do both at the same time. That barrier is gone now, so what they’re able to do now is do transactions and analytics on the same piece of data in the same time on the same platform. What that means for the average user is that they now have at their disposal everything they need, both the transaction and the analysis and potential input from an algorithm predicting or advising them on the best course of action to take. When you bring those capabilities together into one ERP platform, you’re going to see productivity improvements from that as well.
S/4HANA versus ERP; for this, Simon compared it to thinking about digital photography versus the way we used to do it with film, because if you think about owning a film camera, you had to go out and buy a film, put it into your camera, take your pictures, often had to wait for a month or so before you’d finished the spool, then you either had to take that film into your own darkroom or go in to some service centre where you handed your film over and you’d come back a couple hours later if you’re lucky, maybe days if you weren’t, pick up your prints, have a look through them at the counter, maybe hand the film back for reprints, then you take those prints, go and put them in an envelope, take that to the post office and eventually granny would get that photo of your grandchildren or your cat or whatever it was. Think about how that long, tortuous and quite costly process has changed in today’s world. You pick your phone up, you snap that picture, take as many takes as you like until you get it right and it’s instantly out there on Facebook, Instagram or wherever you want to share it. It is a completely different experience taking advantage of a completely different set of technologies. Simon said that that is what SAP have done with S/4HANA, they have created, fundamentally, something that still looks after your business, but does it with the best of modern technology rather than the kind of mindset that we had in mind when we first built ERP systems back in the 90s.
Our next guest was Maria Parpou, Chief Product Officer at Barclaycard Payment.
Maria began by explaining the impact that an inefficient payment system has on the UK’s productivity as a whole. She said that there is actually quite a significant impact, and that if you as any medium sized company, they will say that 50% of their time is actually being spent chasing payments and invoices to be paid, which is extremely inefficient. In fact, she added that most businesses almost have a ratio which says actually if ninety five percent of my invoices outstanding are getting paid, then I hit the hooray button. This is because sometimes, for smaller invoices that have not been paid, it can cost them more to chase it than actually to let it go. Maria said that the process can feel very disconnected and very manual for a lot of businesses but also, if you look at people paying for invoices, it’s similarly inefficient. There are many different stages involving many different people, from receiving an invoice, checking it, approving it all to being put in the banking system and input all of the details or through an automated ERP system. It takes, on average, about three weeks between an invoice being received and an invoice being paid because the approval process takes such a long time. So, there is a lot of people involved in making and receiving payments in a company which ties up in productivity.
Maria made the point that in these unprecedented times, cash flow is going to be tight for a lot of companies who are currently in difficulties. We live in a very connected world and companies need to protect their supply chains; however, it is difficult to change a well embedded system at such short notice. She believes that in the short term, the effort needs to be in understanding who are the suppliers that you need to pay immediately, as well as run analytics around your accounts payable file to see how reliable some of your suppliers are and assess whether you really need to check all of those invoices. People need to start implementing what are called speedy approval processes so they can then get the money to the companies, even if it is low tech at the moment during these times. One needs to very carefully think about how you actually organize the payments to your suppliers in the most cost-efficient way, not just thinking about the cost of the payment overall, but the cost of the end to end payment, including the processing for it. As a payment company, Maria said that one of the biggest inquiries that they have had over the past week has been demand for online payment acceptance because a lot of companies are moving away from face to face into the online environment or companies are pivoting their business models to serve communities online. For example, a lot of pubs are closing but they have not transformed their businesses into a food delivery business because they themselves have an established supply chain which delivers them fresh fruits and vegetables. However, what some of the pubs are correctly doing is asking whether they can sell this produce that is already coming to them, on to their local community. Maria said that they have had inquiries asking how these places can receive fast and efficient payments, she said that one way to do this is to switch to a card acceptance, which can be set up very quickly. So, the company can receive payments online or over the phone using cards, moving away from traditional paper invoices and then waiting for a backup payment to arrive.
Maria stated that the late payment directive was a very good initiative that the government has put forward because it has prompted everybody to think about their DPOs and DSOs. It has also focused peoples minds to look at the processes that they have set up and what they can do to make their payments more efficient, as Maria said, there is payable outstanding and sales outstanding as a measure to look at, it may say in the invoice, payable within 30 days, but that often doesn’t really happen. She added that they have had a lot of inquiries and a lot of discussions with their clients to say how they can transform their payables department or receivables department in such a way where they can match payments with existing technology that they have. Such as automating the processes or different payment methods which are easier to accept. So, for example every time you have an order, you send a purchasing order and you send a card payment with it so that the supplier can fulfil the order and draw the card payment and get paid immediately. There’s lots of things around digital payments which are able to be embedded into the whole procure to pay process to make payments. This means that the payment is not an afterthought but as it is embedded into the process it can happen automatically when an order is filled. Very much like Amazon, for example, or with any other online shopping. A lot of B2B payments are moving to that model and the directive actually accelerated that in many ways. People started looking for a better way, a more efficient way to go about their payments. Maria mentioned that in the current environment it’s obviously even more important that suppliers get paid on time, businesses continue to function, and they don’t run out of cash flow. She said that they really welcome all the initiatives that the government is starting to put in place in the last couple of days to support businesses through their cash flow problems. The businesses then have to think about how they filter or funnel some of the credit over to their suppliers who are in equally dire straits. So, because we’re all living in one ecosystem and if one supplier folds over, then a lot of companies can’t function because they rely on their suppliers. Maria believes that we will see a domino effect as the government is injecting credit into companies and that rolls over into their suppliers and keeps the clock ticking for our economy.
At Barclaycard, Maria said that they have a product called Precisionpay, which is a B2B payments platform which is specifically tailored to making it easier for companies to pay their suppliers. The product works in tandem with a business’ ERP systems and it allows customers to use their virtual cards, a new digital credit card payment method. So, with this product you can pay tail end suppliers who accept card payments very easily through it, and provide all the reconciliations, all the detail data that you need. You can also pay suppliers who don’t accept cards with it, because you can switch from card payments to bank payments, whilst maintaining the cash flow benefit of a card product, meaning that you can pay your supplier today and you can pay Barclaycard 30 days later, just like you do when you as a consumer go shopping with your credit card. You don’t pay immediately; you get a bill once a month. Maria said that they have taken the simplicity of that consumer product, which is basically you pay your card bill once a month, and have adopted it in a corporate environment, allowing companies to pay their suppliers either with bank payments or with card payments and pay them once a month, injecting a 30 day cash flow on all of the supplier payments. Barclaycards work hand in hand with their customers, they analyse their account payables file and try to optimise it for cash flow but also for their processes. Maria added that sometimes they say to their customers, if you pay someone on the purchasing order and you know your supplier and you trust them, why don’t you give them a card payment attached to the purchasing order, which is a 16 digit virtual card number, which can only be used for this particular order and as soon as the order is fulfilled, your supplier can draw on it. There are many ways in which Barclaycard are working based on this precision pay platform for many companies who adopt that. You can take advantage of early payment discounts that your suppliers might offer you in an automated fashion.
She explained that they provide the customers with an ongoing analytics tool so that they can analyse the account payables file before, to see some of the pain points in terms of outstanding DPO (Days Payable Outstanding) days and some analysis of their suppliers. They continue analysing it after the implementation to see if things have improved, what percentage of payments were on early supplier payment discount module.
According to Maria in five years from now, payments will not be executed in the same way as they are today. They will be completely embedded within the technology process of communicating and exchanging orders and working with your suppliers. We increasingly go online in everything that we do from sending an order, approving an order, fulfilling an order and systems become, from a technology perspective, much more linked together. A few years ago it would have been via phone call, for example, or a fax that you tried to communicate with your suppliers and you received the goods or when you receive the invoice on the post and then you go and pick the piece of paper and try to put the details on onto the bank website and send the payment. All of this is moving online. It has already moved online, will move online even further. And the payment will just be an embedded component within that whole process, as payments become more digital and you can encrypt them and you can tokenise them and you can embed them in, the messages will almost be automated, in fact, completely automated is her view. Because you can set the parameters on when you pay your suppliers and the circumstances in which you do so. For example, this suppllier offers a discount. You take advantage of it. All of this can be programmed in such a way that it reduces manual intervention.
Our final guest of this episode was Ben McGrail, Managing Director for the SNP Group in the UK.
SNP is a partner of SAP, positioning itself as a business transformation company, and their clients include organisations such as Airbus, Vodafone and Volkswagen. They provide SAP customers with the technology to speed up and to automate their strategic I.T. initiatives. For example, helping them move to the latest version of SAP, which is S/4HANA, moving their landscape to the clouds, splitting up their systems as a result of a divestment, or bringing them together as mergers and acquisitions. What they do is get into the detail that the data model of an S/4HANA system. Ben said that they provide what is essentially brain surgery for SAP customers.
Ben said that he thought Simon’s comments about enterprise I.T. and the history of ERP and where S/4HANA sits within the context of that were really interesting. He said that the language that SAP use when they talk about S/4HANA is a digital core for an intelligent enterprise, and that’s critical in how you view ERP solutions such as SAP, they sit at the heart of the way an enterprise is run. Companies use SAP to run their financials, their sales, their supply chain, production planning, warehousing procurement, all those key processes to a large enterprise run through SAP solutions. What’s changed with S/4HANA is partly the technological benefits of the software itself, such as the in-memory database, the new generation of database that allows customers to run huge volumes of data through their S/4HANA system and what that allows them to do is bring some of that analytics, the big data analysis back in-house, back into the S/4HANA system. So, you’re bringing that back into the core and you’ve got everything in one place. But more importantly than that, perhaps, is the way the S/4HANA allows you to leverage some of the other new technologies that are starting to become so important in the world. Public cloud offerings like Amazon Web Services, Microsoft Azure, Google cloud platform, the ability for companies to take that hosting work and put it into the into the cloud. Robotic process, automation, artificial intelligence in Internet of Things, all of these kinds of new technologies are enabled through S/4HANA and when the previous version of SAP was originally designed back in the 90s, none of this was on the agenda. So, it’s a completely different reimagining of the architecture of SAP. Ben added that if we look at how you measure significance of new software, it can’t be by how quickly something gets adopted. For example, in the case of Zoom, with the Coronavirus, has just taken over the world, and like a lot of new technologies, it has scaled very quickly, helped by the internet, whereas other technology takes a little bit longer to be adopted. Ben believes that the key measurement of significance is whether once something has been adopted, do the people go back to it or do people change back to what they had before? He said that if you’re looking at things like cloud and process automation and artificial intelligence, once this is adopted, it’s here to stay. So, all of these new technologies are going to be hugely important in how people work and how companies run their businesses. And S/4HANA is going to be key to that for the majority of large customers.
To pick up on what Simon said about productivity and how it measures how effectively you’re deploying your assets, Ben said to bring that back to the two of those key assets, which would be a company’s people and the company’s data, and how he mentioned the in-memory database and how you can bring some of that analytics back in-house, back into S/4HANA and really drive value from that historical data that you’ve spent years building up. That’s a very important point around robotic process automation, artificial intelligence and are people worried about it taking jobs? Ben added that what we’re seeing in any successful I.T. transformation is the ability to release people to perform higher value tasks. There could be any number of cases where the advances of S/4HANA are releasing people to work in different ways and to spend time on high value activities. In the market economy where we are, where we all operate, companies and societies are built on the incremental gains that come from that that kind of productivity improvement, so on the one hand, customers are looking at S/4HANA from the point of view of how do I drive productivity? How do I improve the way my business operates? But that can’t be done outside of wider questions of enterprise transformation now, because SAP really does sit at the core and you can’t decouple a large-scale SAP program from what else is happening in the business because it’s so critical to how a business operates. So, Ben said that when clients come to them and businesses need to see any kind of large scale I.T. transformation within the context of a business transformation, customers who are looking to move to S/4HANA are often at the same time looking at what else they need to do to their system to take full advantage of that. So, a customer who has grown through acquisition and maybe has three or four SAP Live Systems, perhaps wants to consolidate those into one single S/4HANA system and bring everything under a single management. A company who has sold off a number of businesses since they first implemented SAP doesn’t want to take across all of that data into the new S/4HANA system, a company who currently manages their own SAP landscape, may want to move it to cloud hosting public cloud at the same time as migrating to S/4HANA and what SNP’s software allows customers to do and the reason customers come to them for help is; understand what they have in terms of the size and scale of their SAP systems, the volumes of data, the types of data they have, what kind of companies sit within what kind of interfaces. So, they can really do a software led, fact-based assessment of their SAP landscape and then to work with the clients to understand what’s possible at the same time as moving to S/4HANA. So, SNP work with their clients to merge and move and split their systems at the same time so they can really take advantage of business change and drive business value out of these projects, as well as taking the technological benefits of moving to a new version of the software.
Ben gave an example of their work with Airbus in Germany, Airbus’s commercial aircraft division, came to SNP with specific requirements. He said that Airbus have five older SAP systems that have grown over time and they wanted to migrate to S/4HANA, what SNP worked with them to do was to merge those five older systems into one single S/4HANA system. So, Airbus were able to take the technological benefits of moving from some of the older systems to the new one with all of the improved reporting and the faster month end and the better management of their stock at the same time as stripping away all the dead wood of the inter-system transfers that were having to happen every month end and really consolidate everything into one system and get quicker, better decision making. That was a consolidation of five systems into one S/4HANA system. Ben also mentioned that they have been working with IBM in Germany to migrate Vodafone off their older SAP system and onto a new S/4HANA system, some of the benefits that they got from that were a significant reduction in redundancy, data volume and in complexity. So, Vodafone were able to re-imagine how their processes should be working instead of just taking across their processes as they were. That is what Ben meant by driving business value at the same time as technological benefit. He added that Vodafone reduced their data footprint by 90 percent in this project by stripping away some of that older redundant data as they moved across and they were able to reduce their custom code, the bespoke processes they had put together over the years and go back to standard, they’ve been able to reduce that custom code by 60 percent. So, there are some significant benefits there in terms of complexity. He believes that there’s an agenda throughout the industry to get away from some of that complexity and to consolidate around a single system or a much smaller set of systems to allow themselves to be able to position and react much more quickly in the future. The more complexity and the greater the number of I.T. systems that you have, if you were then to sell off one of your businesses and you need to get that under the terms of the divestment deal, you need to get those systems split within six months. It’s very hard to do that if you’re looking at 20 to 30 I.T. systems with all sorts of independent data and redundancies and processes that flow across all of them so, what SNP are helping clients to do is to really position themselves for the future and strip everything right back to a much more simple architecture going forward. Ben pointed out that both of those examples were in Germany, SNP is headquartered in Heidelberg, which is part of the ecosystem that sits around SAP’s headquarters in Waldorf and it’s true that in the SAP world where Germany leads, the rest of the world tends to follow, German companies have really been taking the lead in that migration to S/4HANA and perhaps some of the rest of the industry’s been a bit slower looking at it as a cost when Ben believes that a much better place to start is to look at current I.T. landscapes and architecture and say, is this where we need to be in five years, in 10 years’ time? And if it’s not, take the chance to drive business as well as technological benefit from this from this project.
Ben explained that the I.T. industry generally is fairly well set up to handle remote working. SNP are having to reconfigure how they work with customers, face to face workshops, face to face meetings, are obviously no longer possible for the moment, but largely in terms of how they work with customers, that hasn’t changed. The real difference is between the various industries and the impact that Coronavirus is having on them, customers in the in the travel sector are being much worse hit than customers of SNP who are in the in the consumer goods sector. What Ben thinks we will start to see is an acceleration in automation and an acceleration in cloud, we’re going to see maybe the growing impact of mergers and acquisitions. So right now, as we get through the next one to two months, a lot a lot of companies are just making sure that there’s a certain amount of survival mode, companies are making sure they get through this unscathed and focusing on cash flow, but as they come out of this, you’re going to see the private equity industry is sitting on a lot of cash at the moment. The stock market valuations have gone down, which is going to create the downward pressure on the valuations of companies who are looking to sell off businesses. Some multinational companies will be looking to divest of some of their non-core assets to allow them to focus on what’s strategic. He said that there may be a lot of movement in terms of mergers and acquisitions, and a lot of drive towards cloud and automation and reducing the reliance on physical infrastructure and on people led processes. It’s going to take some time, but the impact of the Coronavirus and in terms of international business and the way companies interact with their I.T. landscape, is going to be huge.
One of the points Ben spoke about in terms of automation and artificial intelligence and relying on people, that has become very clear as everybody works from home is how much we rely on other people. He added that he thought that the point that Simon made about artificial intelligence, releasing people to work on higher value activities rather than replacing people is hugely important. He believes that all of us have had a, perhaps a once in a lifetime, chance to rethink how we work and how we work with people and start to re-evaluate or see the value of the people around us. We’re all getting to spend a lot more time with our families but at the same time finding it obviously very difficult to get face to face with our colleagues. Ben explained that he doesn’t think things will be quite the same when we all get back into our offices at the end of this.
Over the next five to seven years, when you look at the number of customers that SAP haven’t yet moved to S/4HANA and on the assumption that the majority of those will move to S/4HANA over the next few years, you have well over 100 customers per week that need to make that move, Ben explained. He said that if your competitors are making that move and are driving the business advantage and the productivity gains that have been talked about with the other guests, you don’t want to be at the back of that queue. Ben’s advice would be to get started to work with SAP and to work with your partners to build up a very clear view of what you want to achieve as a business and bring that into this project, really make sure that you merge the benefits of the business transformation that you’re trying to drive with the with the technological advantages of S/4HANA and to start that journey now.