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DIGITAL DISRUPTION: THE CFO’S SECRET WEAPON

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DIGITAL DISRUPTION: THE CFO’S SECRET WEAPON

By Lone FønssSchrøder

Among the issues facing boards these days, none is more frightening than the prospect of innovators nullifying a business model or strategy, seemingly overnight. Well-publicized stories of disruption are a constant reminder that at any time, new and unrecognizable competitors can come up from below with high-growth start-ups built on compelling value propositions, lean digital company models, big data, and real-time intelligence.

Driving the point home is McKinsey & Company’s Strategic Principles for Competing in the Digital Age. As their recentarticle reports, a banking CEO said that his respective industry is in the midst of a transition that occurs once every 100 years. And it’s not just banking – every business in every industry is increasingly surrounded and affected by the rise of information technology.

Tech titans like Google and Amazon, with digital in their DNA, have pulled the rug out from under many companies. Meanwhile, smaller innovators like Uber, AirBnB, and Netflix have irked or eliminated incumbent players in their respective markets.

Boards of nearly all companies, and the leaders that report to them, now face the paramount task of responding to the havoc (and opportunity) caused by business’s total digitization and most, unfortunately, don’t have an answer.

Digital disruption doesn’t only apply to shaping industries: it starts from the inside out. As corporate leaders prioritize their digital agendas and explore ways to enhance capabilities, there’s huge potential to make an impact in an overlooked place: procure-to-pay (P2P). I believe boards should urge corporate leaders to transform their internal purchasing and payables from a manual, back-office function into a digitized, real-time cycle and an on-ramp for digitalization. Let me explain why.

Typically, board meetings review the order side of the business. Everyone wants to know where the next quarter is going to land. However, the order side is only one part of quarterly results and unfortunately, understanding spend and its inherent risks is still a big challenge. Too often, internal processes are manual and extremely slow; and the moment you know where your cost position is, it may be too late – leaders end up reporting a significant surprise to the shareholders, impacting stock prices.

Furthermore, most large-cap companies today function like banks, managing complex money flows across multiple business units. Their challenge is to properly design those flows, and implementing changes quickly when needed is hard without real-time cost and order data.

To meet the demand for visibility into costs requires a centralized and digitized procurement, AP, and treasury. P2P transformation is no longer limited to reducing costs, eliminating inefficiency, and meeting KPIs. Progressive organizations are managing growing streams of data and converging them into actionable insight to help support decisions made in the Chief Financial Officer’s office. They’re accurately predicting quarterly costs to improve analyst ratings, and even reduce currency risk, which I’ll explain later.

For most, however, P2P digitization as a strategic priority is nowhere in sight when it should be. Take manufacturing, construction, and engineering companies, for example, which operate on less than 10% margins. To make a profit, many are transitioning into managed-services companies, such as Rolls-Royce, which now delivers engines as a service. Such a transition means increased reliance on other businesses (suppliers, partners, etc.) which, in turn, means a need for closer and more seamless connectivity and much more transparency. They’ll also need real-time information to help maintain and grow their margins.

Unfortunately, most are not going to get that kind of information using legacy ERP systems. If anything, because ERP software projects are typically plagued with long implementation timelines, cost overruns, and little focus on the real-time aspects of the business, they leave you at high risk for ending up with different results than you expected from your supply chain. Those with high debt will be put at risk. Such cost volatilities can trigger a breach of a debt covenant. At worst, that can spell game over.

Supply chain risk can be greatly mitigated through digitization. An open network of digitally connected suppliers means that their data is born electronic, rather than paper or PDF. It enters buyer systems through the cloud as purely digital, flowing into applications and tools in real time to inform everything from supplier master data to payment terms, and beyond. Far from being a luxury, digitally based analytics can make or break complex decisions, such as choosing between two different currency strategies.

A digital agenda also delivers the real-time information needed to reduce guesswork, and it makes events or decisions more predictable. This is helpful for shareholders and for the banks that provide loans or credit. Real-time data improves compliance to debt covenants and helps to monitor and optimize working capital processes. Consider the cost to your company if you cannot expand because you don’t have enough cash and can’t get credit. Reframed, what is the cost if you don’t have control of your information? With the right technology, you can have access to that information. If your company is listed on an exchange, there’s no reason why Wall Street analysts should have better information about it than you do.

By driving a digital agenda in procure-to-pay, business and finance leaders can benefit their organizations in three ways:

  1. Process optimization: By increasing use of electronic invoices, you can reduce approval cycle time, supplier inquiry calls, and invoice exceptions (by having suppliers resolve exceptions themselves). At the same time, you can improve visibility into overall AP processes and increase global compliance. Process optimization can save up to $7M per $10B in spending.
  1. Financial returns: Automating accounts payable opens the door to huge savings and returns present with dynamic discounting. Essentially, you can invest cash safely at rates that can significantly exceed returns from many other traditional investments. Using programs and other working capital optimizations can result in up to $30M in savings per $10B of client spend.
  1. Indirect cost savings: Currency risk is multiplied by the time it takes for transactions to be available in an ERP system. Speeding up the availability of transactional data – specifically, actual invoices that have future foreign currency obligations – will help your treasury make timely strategic foreign currency decisions that can result in significant savings. While a PO or similar order system can serve as a plan-ahead mechanism with lesser visibility and accuracy, access to real-time invoice data in foreign currencies before this data makes its way through an ERP system can be an effective tool in foreign currency hedging strategies. Your treasury staff will be better able to seize favorable FX rates and know when it is best make local currency payments.

Defunct major companies like Blockbuster, Circuit City, and Tower Records are prime examples of victims of the first wave of digital upheaval. A new wave is now upon us that will touch every industry, even those thought to be immune to disruption. (Deloitte hascoined such industries as “long fuse, big bang,” which include health, education, and utilities.) By targeting your digital initiatives at procure-to-pay, which regardless is already in need of modernization, you can begin to deliver the one-two punch that will keep you ahead of the disruption.

Finally, one of the companies on the forefront of helping enterprises digitize procure to pay is Tradeshift, a Danish startup that is now based in San Francisco. Born in the modern cloud era, the company, which is led by pioneers of e-invoicing in Denmark’s public sector, has built an open platform that facilitates the flows of data and transparency that I detailed above.

Lone FønssSchrøder is a member of the board of directors at Volvo, AKSO, SAXO, Schneider,Valmet, and Advising Credit Suisse – Towerbrook, and a co-owner XO &Norfalck.

Business

Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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