Analysis Helps to Eliminate Costs from the Value Chain
 
The value chain analysis detailed in the previous issue enables leaders to systematically assess where, how and why their organizations create value for customers, and determine how to increase that value in primary and support activities. Adding value creates competitive advantage, but it’s not the only factor in business success. The value chain analysis also helps identify costs to better eliminate them from the value chain.
 

Asset recovery already plays a recognized role in maintaining discipline over cost drivers. For example, member data collected by the Investment Recovery Association indicates that investment recovery departments save their companies an average of $8 million annually. Furthermore, member data shows that 70 to 90 percent of every sales dollar generated by investment recovery goes straight to the bottom line as profit. Once your organization or department defines its value chain, a cost analysis helps identify strategies to develop a cost advantage by reducing primary and support activities’ costs, re-organizing the value chain, or both. In his value chain model, Michael Porter identifies 10 cost drivers. Investment recovery professionals can improve their organizations’ cost advantages by specifically addressing many of these variables.

1. Economies of scale. In larger and more diverse companies, IR professionals can identify more opportunities to re-use or re-purpose assets. Also, large companies generate more surplus, allowing IR departments to consolidate lots for sale.
2. Learning. Education and information about IR’s function and potential will improve the value chain from beginning to end by identifying revenue and cost elimination opportunities.

3. Capacity utilization. Investment recovery professionals specialize in optimizing every asset to maximize capacity and expand opportunities, accomplishing more in the same cost structure.

4 and 5. Linkages among activities and interrelationships among business units. IR groups play a unique role because of their interactions with virtually every other group in an organization. Your IR team may be the only group with complete visibility into all the opportunities to move assets among groups, consolidate similar assets from different groups, or package diverse assets from multiple groups into a single package in which the sum is greater than the parts.

6 and 7. Degree of vertical integration and timing of market entry. These are corporate cost drivers that rarely effect asset recovery operations.
8. Organization’s policies of cost or differentiation. Organizational policies that recognize investment recovery as a worthy alternative, or mandate IR as the first consideration in procurement, contribute to its use and credibility. Such policies also can improve the likelihood of pursuing and completing projects at lower costs.
9. Geographic location. IR professionals can minimize transportation costs by locating or deploying assets as close to operations as possible. As companies become increasingly global, IR groups also can play an important role in reducing taxes and import/export duties.

10. Institutional factors (regulation, union activity, taxes, etc.). Asset recovery frequently can accomplish surplus exchanges without creating a taxable event. Re-use of existing assets is important in minimizing exposure to environmental regulations governing disposal of various kinds of waste, especially computers.
 
Companies that control costs better than their competitors are strongly positioned to succeed in the marketplace. Investment recovery professionals are well positioned in their organizations to contribute significantly to cost-control initiatives. The next article in this series will explore strategies to expand IR’s role, beyond cost containment, throughout your organization’s value chain.
 
Promoting IR’s Benefits to the Value Chain
Being an investment recovery professional means there are a lot of brick walls for you to bang your head against. Because IR is rarely a mandatory business activity, finding a seat at the table can seem more like musical chairs. Jokes about “junk dealers” aside, investment recovery can deliver substantial benefits to your organization. The value chain concepts detailed in the previous articles in this series – the value chain model and analysis of primary and support activities and associated cost drivers – can be an excellent starting point for IR teams to promote their high potential throughout their organizations.
 

The surest way to strengthen IR’s position as a valuable internal asset is to demonstrate the function’s worth. For example, Investment Recovery Association member statistics reflect that IR professionals have saved individual companies as much as $150 million in only one year, and that it would take $20 in new sales to match the net profit generated by just $1 of IR activity. Business leaders understand these kinds of statistics, and Michael Porter’s value chain model and analysis can help you identify where and how to quantify the IR team’s benefits. Leverage the ideas generated by the value chain analysis by establishing relationships that deliver benefits to various groups based on the synergies that investment recovery teams are uniquely qualified to see. If necessary, establish a regular meeting that includes all the groups in your organization to ensure they are contributing equally to this vision. If you don’t have an enterprise resource planning system, or if your existing system does not include the applications necessary to facilitate these kinds of exchanges, work with your IT colleagues to implement that functionality as part of the ERP system or as a standalone solution.

 

As an example of possible synergies, IR managers should consider the following: The administrative services executive has hundreds of obsolete PCs, which may be serviceable for other needs within your organization. Remote operations may be able to use the PCs for email and intranet communications with headquarters, improving efficiency, responsiveness and morale. Research and development teams may be able to unite multiple PCs into a virtual supercomputer with grid software, eliminating a significant cost or accelerating productivity. Environmental health and safety may be able to use the computers to monitor discharge processes, inexpensively complying with state and federal regulations. Community relations may be able to contribute the PCs to a local school, library 
or civic organization, creating goodwill and improving the company’s image, while also creating a tax advantage. All of these new purposes have an easily quantifiable impact on the company’s value chain. All of them are at the bottom of the administrative executive’s priority list and all of them are uniquely visible to the IR team.

 

For each success of this kind, formally observe the win with your team. Develop tangible representation to help communicate the benefits they created. For example, you may have a clear plastic piggy bank that you fill with a piece of gold foil-wrapped candy for each $1,000 dollars you save or generate. Make sure the rapidly filling bank is clearly visible to everyone in the company. When one is full, start filling another one and celebrate at the end of each year by distributing the candy to the group you’ve worked with most successfully. You can replicate a virtual piggy bank on the company’s intranet site, or set up a Web camera to show the progress as it becomes full. Make sure your statistics are clearly delineated in the regular financial reports, and participate in the company’s strategic planning and goal-setting meetings so IR results and goals achieve the same status as sales and revenue numbers.

 

With conscious and regular outreach of this kind, the investment recovery team will improve the organization’s value chain with revenue increases and cost decreases. It will consequently prove its worth to the organization and will be perceived as an expert resource with broad visibility into multiple aspects of the company’s primary and support activities.

Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 4, 2006

© The Investment Recovery Association