EBITDA and SG&A Improvement… the cash flow story (Part 2)

Every penny of revenue leakage fixed and an invalid cost eliminated has a direct impact on EBITDA… after my early journey working on projects which were of the very nature of Quick fix and implementation of best practices and the organization tasted the success to quite a good extent savings few million dollars the next big project I picked up and built a focused team was to Identify every opportunity of Revenue Leakage and fix it.

We identified all areas both in delivery and support functions the potential candidates of revenue leakage and start collecting data around it. It took more than a couple of months to streamline the operational definition for revenue leakage and a series of meetings with various stakeholders and the user community we finally agreed on the common operational definition  and what finance team will sign off (this was very important step) as savings generated by fixing the revenue leakage.

We defined Revenue Leakage as “Money not recovered on time either from the customer or the vendor or employee. Any outward cash flow as a deviation or exception to the set policy or process in place will be considered as Leakage”

Clear instruction on this project was no notional savings will be considered unlike other projects where cycle time savings were multiplied with a volume number and quoted as notional savings.

We picked up the following three areas to fix in this fiscal where an opportunity for leakage occurs…

1.       Days Out Standing / Accounts receivables

2.       Recovering Advance Payments from employees (ForEx and Travel related)

3.       Leave management in T & M assignments 

As a next step we started measuring to baseline where we stand internally and in comparison with industry benchmark. A dedicated team of data analysts were hooked up with the finance team to conduct a data collection exercise and we engaged with a third party consulting firm to benchmark our company with the competition to understand the variation.

While this exercise consumed time there was a definitive number that popped out, of course it was not easy to gather consensus from all and again a series of brainstorming sessions following with what is in scope and out of scope, what should and should not be a part of the data and the further debates took about a few fortnights to finalize. In this entire endeavour while the support from the senior management continued to exist it was a herculean task to gather the support and time from middle management and build the momentum. Mobilizing commitment looked very bleak at the very beginning of the exercise and we had to struggle to get the information from all sources and plug into an excel tracker before coming up with a baseline number … The irony is that the very people you need on the ground hands on are already overburdened with so many activities and tasks that often makes it very challenging to accomplish some simple tasks…. Nonetheless we did it…

The next step that we took based on the inputs from the subject matter experts and the inputs provided by the third party consulting firm who did come up with initial recommendations after the bench marking exercise was to look at the entire set of events and classify them into three broad categories and established role / process clarity to address the situation…

1.      Risk Management : The role of this group was to look at every opportunity and map it with the existing processes and identify possible risks and then address them appropriately as per the risk matrix

2.      Leakage Management: The very role of this team was to constantly look at all opportunities in the existing mechanism the possible leakages and overcome them. Under the umbrella of leakage management we had a couple more sub teams formed to strengthen governance and compliance especially around the SLA Clarity and automation. A separate operations team looked at contracts, warranties, and entitlements. We strengthened our internal interdependencies and raised the need to connect them together… data always exists but is difficult to access… by connecting and overcoming the dependencies and the strengthening the online repository which connects the business operations, sales, compliance, finance, and the delivery with PMO and Governance team working hand in glove was quite a challenging tasks that took sometime to shape up quite well and now we have a strong recommendation in place to have a team of dedicated and focused group of experts who look at wing-to-wing service life cycle

3.      Leakage Prevention: The very challenge we faced in this situation is educating the folks on the difference between customer satisfaction and billable assignments… while it’s important to address the needs of the customer, it’s important to educate the customer the services offered will come at a certain cost especially in a T&M mode where every minute is billed. When brainstormed further we discovered the root cause is the contract document availability and access to the engineers on the field onsite with the customer who are unable to understand if the piece of work they are doing is covered under the terms and conditions or the post maintenance activities or not… there was a huge cry on confidentiality and other such stuff during the arguments which many initially made a noise and finally agreed on the sharing the contract knowledge to ensure things fall in place…. What the very human nature filled with unknown insecurities stops the CRM software’s help the folks onsite with the customer and a very learning we discovered is having access to critical customer data helped cross-selling and upselling thus helps the revenue stream...

Very strong and stringent monitoring of advance payment collections and associated tools which connect the pay-outs and collections were put in place and the IT Team started working on the tool enhancements

Inputs were shared with the HR team on the leave management policies to be revisited which can help the revenue leakage, a set of senior department heads with the HR team coupled together to come up with a policy around the same, addressing employee related sensitive areas need extra time and caution on the roll out of the policy and so measures and steps were put in place to ensure the communication is seamless…

Analytics with dashboards showing Red , Amber, Green (RAG) status are in place, the team will continue to monitor the progress periodically and few months down the line I will again engage with the team to see if the controls put in place are adequate enough or additional things are required to be done…

In a nutshell my learning out of this episode can be summarized as below…

1.       Human nature is the most important one to focus up on; we already know all the solutions but lack action to accomplish it… processes have to flex with the business when ever business and the people running the business demand it

2.       My facilitations skills matured further working with folks from various teams and getting them all together in sync and signing off an agreement on the new process

3.       Digitizing the solutions and cementing the structure using an IT Tool is the only way to strengthen the control… nonetheless we live in an excel based world and exceptions are a part of it, no matter what controls one puts in, someday the exceptions and ad-hoc processes will overcome the discipline and one needs to revisit for continuous improvement that is incremental in nature…

A potential cash flow greater than USD 5 Million year on year is the initial estimate with the recommendations and process changes put in place…

EBITDA and SG&A Improvement… the cash flow story (Part 1)

26^th June 2013, the day two giant IT Companies merged officially and the market stopped tracking Mahindra Satyam and the only entity continued to exist is TechMahindra.

This was the day I took over a role as a Sr. Consultant in the business and process space to contribute towards driving continuous improvement projects to enable free cash flow thus improve the EBITDA (earnings before interest, taxes, depreciation, and amortization) … one of the most critical measure of the company's valuation tracked in the capital markets by the financial experts.

As a first step we spent time with the business leaders who looked to maximize the return on investments evaluate impact of operating the business on free cash flow. In an environment of maximizing value, it was important to review all business expenses and conduct a profitability analysis across all the projects. In so doing we discovered at the project level the contributors who impact EBITDA, which increases the value of your business and the ones who are pulling it down. As a next step I and my team lead by the best of the leadership worked hard to help understand sales, general, and administrative (SG&A) and look to maximize those costs as a percentage of revenue.

 It’s a known fact that High operating costs lower your EBITDA… one of the things that I have done in the past is to quickly identify all value enabling activities and digitize them those that will need people involvement outsource them to low cost channels. I carry a very strong philosophy from my past experience that my people will work only on the value added tasks and process rest all value enabling tasks be outsourced and kill the non-value add. The first few suggestion made people hesitant to entertain the idea of lowering operating costs because they immediately equate it with lying off employees. It took quite some time to educate the crowd that there are a lot of other ways to lower your operating costs without reducing staff. Could be as simple as turning off your machines and lights to save energy, wastage of food and the network usage to start with the journey of Lean following the principles of HoShin KanRi and go with the policy implementation.

Ideas and best practices picked up from the experience of the past helped spin a quick fix just do it kind of projects around Cycle time improvement that directly impacts billability. Two teams were given tasks to build the six sigma culture as a DNA in the organization.  8 – 10 leaders in a consulting role attached themselves with each business group.

I owned the entire set of support functions and kicked off the improvement path by checking for areas of inefficiency that can be corrected with new policies and procedures … focus was to be lean and quick on the solution front without spending a lot of time on data collection and data analysis, because it’s a known issues to all just an as is process / value stream map is good enough to identify waste and eliminate it strengthening policies and procedures.

Wing to Wing financial analysis of each support function opened a wide set of opportunities to focus up on… Cab usage, arrival pattern and employee commutation costs were identified to fix asap and then engaged a team from facilities to pull down the power tariff and work towards improving efficiency on energy usage. Companies like GE and Philips were consulted and engaged in the solutioning and implementation of ideas.

Visa Cycle time and Air Travel was another big ticket item that was looked at. No doubt that a growing company will have a growing spend on the travel and the ticket prices are equally volaitile, but there were a lot of opportunities like blocking the ticket 6 hours in advance, reducing approval cycle time w.r.t. travel request, choice of travel class (Economy / Business), Travel mode like Air, Road or Train, effective use of technology like telepresence and video conferencing, strengthened planning to reduce the last minute cancellations, overcome date changes in travel. Policies governing around international travel and the per diems associated etc… accounted a good round of savings.

Infrastructure spend was another big-ticket item on the list which owned a lion’s share of the budget, with growth comes the overheads related to network and datacentres, storage and spend on TSP. Reducing the call volume and number of service requests was another area that improved productivity, reducing the approval cycle time and simplifying the approval matrix made the operations lean.

Projects were spinned around DSO… days out standing … the accounts payable and receivable cycle time, employee reimbursements, finance ERPs, invoicing defects and delays and wing to wing cycle time at the collections front added more savings and directly impacted the bottom-line which was an icing on the cake resolving quite a good amount of issues related to the cash flow.

Optimizing the wing to wing resource supply chain and hiring cycle time, enabling ease w.r.t. joining formalities made life more comfortable adding at least 35 days of additional billability and improving the revenue stream added a new flavour all together to the program.

While you have read the positives and the things done we encountered a situation where like any other company the execution looked bleak, as long as there was focus things were moving and as the focus shifted there variation crept in. IT Systems and structures did not help much. Performance targets were poorly defined we lacked insights into the long term levers, while the near term picture looked great there were concerns around the sustainability and long term results were questionable.

This is a time when we looked like being exhausted with the ideas and best practice picked up from the market and most of the things already implemented, there was nothing new to identify from a cost optimization whereas there were a lot of opportunities around cycle time improvement that will lead only to notional cost compared to hard savings that could impact the bottom line.

It was a time to rethink on what I was actually doing, initial enthusiasm and quick fix projects from the past experience will not help in the long term and I need to now strike the right balance between targeted reductions, re-allocation and re-investment in areas that can driver higher overall expense productivity over time. It was very important to establish benchmarks that are truly “apples-to-apples” and start looking at highly-granular spending breakdowns; more importantly clear understanding of the strategic, tactical and organizational “drivers” of world-class cost structure performance is something I started to focus up on.

Days passed by and a series of brainstorming session threw light on prioritizing the strategic goals, relooking at the degree of centralization and empowerment to local teams, funding mechanisms, vendor rationalization, realigning roles and responsibilities, hierarchy … head to tail ratios, opportunities of outsourcing as a new set of projects to focus up on in the coming year….

While the first year was a cake walk with quite a good amount of savings making the bottom-line healthier and reaching the set goal, it’s in this coming fiscal that a lot of people in raising eyebrows to ideas being brainstormed and extending surface level … people involved at middle and lower management feeling insecure as soon as talks w.r.t. outsourcing and role rationalization were being discussed … nonetheless a lot of support from the Sr. Management is adding a lot of confidence to the program and the determined will and focus is helping me overcome all hurdles and moving forward to accomplish the goal…  truely a great expriance and awesome company to work with :-)