Latin America is rich in opportunities, from growing market reach to rationalizing operating costs, but these opportunities are not exempt from related challenges.
For nearly two decades, we have been working in Latin America in a variety of consulting roles and, more often than not, we see our clients consistently facing one or more of the following issues:
- Managing Complexity
- Understanding Cost to Serve
- Improving Working Capital
- Optimizing Back Office Operations
- Leveraging Technology
We started a series of blog posts to share some of our views and lessons learned on these topics. The first one, Five Pressing Issues Confronting Multinationals in Latin America, provides an overview and sets up the discussion context. In this post, we will delve into the role Technology plays for LatAm Multinationals, and how it should be leveraged to improve business performance.
LatAm Multinationals have for quite a while now enjoyed some of the benefits of establishing operations in the Latin America region. From labor arbitrage to a growing middle class and underpenetrated markets, the promise of lower production costs, scale and free trade has lured many foreign companies to venture to the Central and Southern American territories.
However the same circumstances that make the LatAm region an attractive investment might be making LatAm Multinationals miss out on increasing profitability, due to limited investment and/or lack of understanding of enabling technologies and business solutions.
With operating costs per FTE as much as 60% cheaper in some LatAm countries when compared to those of the U.S Tier 2 cities according to Market Insights; there is no denying the cost arbitrage the region offers. That said, it is this same arbitrage, coupled with a technical knowledge gap or a resistance to change “business as usual,” among other factors, that might be hindering management from leveraging new and existing technologies, including those the company might already have available.
Nonetheless, a recent survey from McKinsey shows a compelling business case for making these investments. In a study dated June 2016, it surveyed the top 35 consumer good companies in LatAm to identify what “winners” do differently from their peers. In this case, “winners” are those companies that achieved higher sales growth, while also outperforming peers in one or more customer or in channel-management metrics.
The study helped uncover the following “best practices” that, unsurprisingly, were related to technology:
- Companies that chose to invest in technology to enhance their supply chain and route to market capabilities achieved sales growth of 4% (vs. -2.1% of peers).
- Companies that chose to invest in analytics that drive pricing and trade investment strategies achieved sales growth of 7% and 5.4% respectively (vs. -0.4% and -0.5% of peers).
- “Winners” also said technology is key in a number of sales processes, including GPS tracking of salespeople and POS surveys. Also, they are more likely than others to have direct access to retailers’ POS and inventory data and to capture store data themselves using smartphones and other handheld devices.
But these are just a few of the technologies yet to become mainstream for all LatAm Multinational companies. The list is much longer, and varies by degree of difficulty in terms of implementation and resources required to roll out.
For example, building Workflow capabilities would allow companies to automate redundant tasks throughout the organization, manage processes and activities more efficiently and, in turn, decrease costs. Furthermore, the use of Optical Character Recognition (OCR) for accounts payable, invoice processing, expense reporting and auditing eliminates the need for repeated data entry, reduces cycle times, minimizes errors and prevents fraud.
Under the commission of Nintex (a workflow automation software company), Forrester Research conducted an independent study of the economic impact of implementing a workflow process platform, using information provided by Nintex customers. The study revealed that the implementation of Workflow to manage processes increased productivity resulting in: a three-year ROI of 176% and an NPV of a little over $1M with a payback period of 10.5 months on average.
Notwithstanding this, not all technologies are focused on cutting costs. Technology is also an enabler for growing revenue and increasing marketing efficiency. Business Intelligence such as predictive analytics, data mining and segmentation models allows companies to better target and reach customers with a focus of establishing long-lasting relationships. Customer Relationship (CRM) has been around for at least 30 years, but never before could it be exploited as it can be today due to the advance of technology.
Understanding the Benefits
In 2012, Oracle also commissioned a study to examine the total economic impact and potential return on investment that enterprises may realize by deploying Business Intelligence Applications.
Based on interviews with four existing customers and subsequent financial analysis, the study showed that companies that implemented Business Intelligence applications can expect on average: an ROI of 97% and an NPV of $9M with a payback period of 20 months.
Technology also plays a key role when aligning supply and demand. Advanced analytics, and the ability to compile and analyze data in the “cloud” are feeding business solutions such as: Sales and Operations Planning (S&OP), Transportation Management Systems (TMS), Global Trade Management (GTM) solutions, Product Lifecycle Management Systems and Supply Chain visibility tools, all of which are yielding significant gains in terms of efficiency and cost reduction.
In addition, Enterprise Resource Planning (ERP) software offerings, Distribution Resource Planning (DRP), Supply and Demand Planning and Order Fulfillment Planning allow companies to increases efficiency in the delivery of goods by determining which goods, in what quantities and at what location are required to meet anticipated demand. These capabilities, along with other features drive cost savings throughout the supply chain and free working capital for LatAm Multinational companies.
However, many of these enabling technologies are yet to be fully exploited. The reasons for this lack of use vary from company to company, but generally can be attributed to multiple ERP platforms, problems integrating different legacy systems, poor vendor selection, issues not understanding the system’s key features and underinvestment in training and change management top the list.
In some cases, several of these business solutions’ key functionalities go unused due to companies being unaware that they exist within the application. Yet the benefits of successfully implementing an ERP software are undeniable. Forrester Consulting recently led a study to examine the total economic impact companies might enjoy from successfully implementing an ERP software into their business.
For this purpose, Forrester created a composite organization; specifically: a global midmarket manufacturer that distributes and services its products with headquarters in North America. Forrester then projected the costs and benefits resulting of integrating its financial and supply chain activities with real-time connectivity over five years, and concluded that the total economic impact such a company could expect would be:
Nonetheless, developing these and other technological capabilities in-house might prove overwhelming for some managers; or might not be a central priority to their business right now. For them, a Shared Services center that leverages technology —including ERP software— to carve out, standardize and streamline non-value adding processes while increasing compliance could pave the way for increased profits.
Action Trumps Everything
Leveraging technology in Latin America is one of today’s top challenges for LatAm Multinationals. Managers can chose from developing these capabilities in-house, outsource them or a combination of the two.
One thing is for certain though, it is no longer a matter of if, it has become a matter of when (the sooner the better), and how you will choose to develop your company’s enabling technology and business solutions. LatAm Multinationals need to wake up and answer: How is my company leveraging technology in Latin America today?
Some companies might be surprised to find the answer lies within, in that old ERP module that nobody took the time and training necessary to learn how to use.