By Anne Kohler
According to the Investment Recovery Association’s benchmark studies, professionally run IR departments return more than a 30X bottom-line net profit for every dollar invested in Investment Recovery operations, thus making investment recovery operations among the most productive departments in any organization. Wow! How many investments are you aware of that can claim such a return?
As the function that sits at the very end of the Supply Chain, Investment or Asset Recovery has the responsibility of dealing with the “waste” — what is left over at the end of the manufacturing process or assets that are at the end of their useful life. In most cases, performance is measured by how much revenue can be generated from selling or disposing of that “waste.” If revenue goes up, the ROI increases and Investment Recovery is a success. But an increase in revenue either means IR was able to sell the waste at a higher price — great (maybe?) or there was an increase in the volume of “waste”— not so great!
This measure of success got me thinking about an example we always use at The Mpower Group in the decision—making classes we teach to executives.
In the 1970s, in response to new U.S. pollution regulations, most companies (about 80% according to one study) trapped and filtered emissions (waste) at the end of the pipe, resulting in rising cost and increased inefficiency. The issue was framed as “How can we filter it out and get rid of it quickly?” A few companies like Dow Corning and 3M chose to reengineer products and processes to recycle the pollutants or eliminate them altogether, which proved to be more costly upfront but much cheaper in the long run. They framed the issue as “What is the cheapest way to produce products with less pollution?” I find this example to be illustrative of the challenges facing Investment Recovery. Do they continue to focus on “the end of the pipe” (this can result in an ROI of 30X) or reframe their role altogether to reduce / eliminate the “waste” at its source (this can result in an ROI as high as 300X). If you were the CEO, COO or CFO, which would you prefer? Here are some questions I would like to ask you — the Investment
Recovery practitioner community:
• Is your role to get the most $$ in the market for “waste”? Greater Waste = Greater Revenue? Is this how you measure success?
• What is the real ROI (Return on Investment) when you factor in original acquisition cost plus supply chain costs plus holding costs (even if you factor in depreciation)?
• Can you achieve a greater ROI by being involved early in the process (design, acquisition, planning, etc.) to eliminate “waste” as opposed to merely selling it at the end?
• Is the 30X metric driving the wrong behavior?
• Are you perhaps providing the wrong service to the wrong people for the wrong reason?
I realize that the questions above are provocative and may be considered “stirring the pot.” But can moving from reactive (being at the end of the Supply Chain), which yields an ROI of 30X and is considered to be Best Practice, to proactive (being involved much earlier in the Supply Chain) which is considered to be Next Practice yield an ROI of 300X? I think so, and by the response I received at the annual Investment Recovery Association conference, so do many others in the profession.
In a recent independent research survey conducted by the Center for Advanced Purchasing Studies (CAPS) at Arizona State University, researchers noted: “Only 29% of the survey respondents said their investment recovery groups are active in trying to prevent the
generation of surplus assets.” We are onto something, I just know it!
Here is a way to think about it (see Figure 1 on preceeding page) Here are a few other illustrations as well: One way a doctor determines a patient’s issue or illness is by examining the “waste” from the human body. Can we think of the IR professional in a similar manner—he or she examines the “waste” to determine the best way to eliminate it as early as possible in the Supply Chain. A restaurant owner tries to decide how to deal with rising costs and menu selection. As opposed to reviewing what people are ordering, she looks at what comes back to the kitchen after the meal is consumed to determine how to adjust quantities and menu options. Today, Investment Recovery probably knows more about the “waste” that is generated throughout the Supply Chain simply because of where you sit. Imagine if IR could get involved earlier (at any earlier point) in the Supply Chain; there is tremendous opportunity to add more value. If not 300X, that’s OK, because there is a great deal of opportunity between 30X and 300X. The chart above (Figure 2) clearly illustrates that Investment Recovery sits at the end of the Supply Chain—you are the receiver of the “waste” or Value leakage and are still able to produce an ROI of 30X. But just imagine the possibilities if you could get involved much earlier. You could close the gap between 30X and 300X.
What is different about an IR function that has an ROI of 30X vs. 300X? (See Figure 3)
How does the role of the Investment Recovery professional need to change if he or she wants to move toward 300X?
If you agree that IR has the opportunity to play a more strategic role, then how do we get there? How do we get to 300X? How do we gain respect in the Supply Chain?
It must start with the Investment Recovery function first. IR needs to change the way it thinks about its role (the context under which it operates) and then change the way the rest of the organization thinks. This may sound easy, but it is not. At the beginning, IR will need to “push” its new role out to the organization while utilizing techniques to create a “pull.” (See Figure 4 below)
But, in order to create the pull, IR needs to redefine its value proposition. To start, IR can no longer define value for its customers. Not asking the customer how he or she defines value is a common trap that many, many shared service functions fall into. Marketing and innovation expert Professor Mohanbir Sawhney has described customer value as, “The perceived worth of the set of benefits received by a customer in exchange for the total cost of the offering, taking into consideration available competitive offerings and pricings.” This definition encompasses seven fundamental lessons of customer value:
- Customer defined — > Non-negotiable
- Opaque — > Non-quantifiable
- Multi-dimensional — > Functional, economic, psychological
- Trade off — > Cost – Value
- Contextual — > Defined by how it is used
- Relative — > Compared to alternatives
- Mind-set — > Based on a belief
IR also needs to ask if it has identified the right stakeholders. Are the CFO, VP of Operations, Chief Risk Officer or the Chief Safety Officer among those IR works with today? If not, why not? If so, have you attempted to uncover their value drivers? Like any shared internal service organization that is trying to transform itself, IR managers will discover that the greatest challenges in doing so are mostly internal:
• Complex cultural dynamics
• Inertia toward the status quo
• Hesitancy to give up “perceived” power / decision authority
• Political maneuvering
• Narrowly-focused decision-making
• Incompatible metrics across functional silos
If the greatest challenges are internal, then a healthy dose of change management will be in order. What will IR need to change?
• What competencies you need
• The metrics that drive / measure success
• How you engage your “customer” (selling)
• A focus on adoption
Let’s start with competency.
The competencies required to move from reactive to proactive, and from process leader to strategic partner, go beyond functional (content). It is the strategic competencies (context) that will be critical in moving from 30X to 300X. (See Figure 5 below)
If you find that your IR function has a competency gap, then one way to close that gap is through a Competency-Based Talent Management program. There is a significant difference between Competency Development (300X – Next Practice) and Training (30X – Best Practice). Some of those differences are highlighted in the chart on the next page.
(See Figure 6)
Next, Investment Recovery needs to looks at metrics. Are they driving the right behavior within IR? Are they driving the right behavior across the Supply Chain? If IR’s revenue is increasing every year, is that an indication of success or a problem somewhere in the Supply Chain? IR must develop metrics that meet the Value Drivers of its customers, are aligned with other members of the Supply Chain and support the behavior necessary to get to 300X.
Since IR will not be successful without the support of its internal customers, it must sell its new role. When putting a selling plan together, IR must think like a sales organization and consider the following principles:
• Identify your market segment and their value drivers.
• Know how the customer likes to receive communication.
• Build the brand.
• Selling the product.
• Educate your customer (stakeholder.)
• Develop effective collateral.
• Establish a need / “Burning Platform.”
• Highlight the value of change.
• Anticipate objections.
• Illustrate what others have achieved.
Lastly, there must be a focus on adoption. As IR changes its approach and processes, it needs to ensure that they are able to be adopted by the organization. Putting in new processes, tools and technology add no value to an organization until they are aligned, executed, implemented, optimized and utilized. At The Mpower Group, we compare the model to a language. (See Figure 7 on next page) A language requires both consonants (foundation) and vowels (adoption). Even though there is much more focus on the consonants (they outnumber the vowels 5-to-1), the language would be gibberish (useless) without the vowels. This is true of any process or change you try to introduce to an organization. Unless the change is ADOPTED, it adds no value. By the way, there will be limited interest in adoption by the stakeholders unless they see that their value drivers have been met. In summary, moving from 30X to 300X is doable!!! It will require IR to play a much different role but one that can add tremendous value to the organization. But it won’t happen overnight. Transformation is a major change that requires patience, persistence and time. But the impact this new role could have on the bottom line of your organization is significant and one most IR professionals should be chomping at the bit to take on. So, Investment Recovery, if you want to gain respect in the Supply Chain…start moving toward 300X.