Tag Archives: McKinsey

Updates from McKinsey

The future of payments is frictionless—now more than ever
Amrita Ahuja, the CFO of Square, explains how the company’s payment platform and services have helped small enterprises stay afloat during the COVID-19 crisis.
By Amrita Ahuja – Cash is king when it comes to maintaining corporate liquidity. It is in a somewhat less prestigious position when it comes to fulfilling consumer-to-business transactions. The onset of the COVID-19 crisis and ongoing fears of infection have prompted consumers and businesses to rely more on digital and contactless payment options when buying and selling goods and services.

How have the past few months been, and what’s changed for Square as a result of the crisis?

We’re taking it a day at a time. We serve merchants, who we call sellers, and individual consumers. And we know that this has been an incredibly trying time for everyone, where a lot of people’s livelihoods have been in question. The first thing we did was focus on our employees and their health. We shut down our offices on March 2. We wanted to do right by our communities and do our part to halt the spread of the virus. We took an all-hands-on-deck approach to understand what was happening in our customers’ businesses and what was happening in our own business. Every single day in March and April felt like a year, frankly, in terms of our understanding and how fast things were moving. We ran through scenarios, and asked ourselves, “OK, if the situation resembles a V, or if things look like an L, or if it looks like a U, what does that mean for us and our ability to serve our various stakeholders, employees, customers, and investors?”

We’ve had to be fast and clear with our communications during a time in which there are still so many unknowns. It was important to own up to this uncertainty and yet not downplay the severity of the situation. We met far more frequently with the board than the typical quarterly cadence. We held an update call with [investment bankers and analysts] outside the typical earnings cadence. We suspended our formal guidance to Wall Street, but we actually shared more information about the real-time views that we were seeing in our business across a number of different metrics and geographies. And with employees, we had a far more frequent and transparent mode of communication. We were sending weekly email updates, we built comprehensive and regularly updated FAQs, we set up a Slack channel for questions, and we held biweekly virtual all-hands meetings. We didn’t know everything, but we had a process for learning things over time and communicating them transparently. Ultimately, that has served us well, in terms of motivating our employees, serving our customers, and giving stakeholders a clear understanding of where we are as a business and how we are proceeding. more>

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Updates from McKinsey

Managing the people side of risk
Companies can create a powerful risk culture without turning the organization upside down.
By Alexis Krivkovich and Cindy Levy – Most executives take managing risk quite seriously, the better to avoid the kinds of crises that can destroy value, ruin reputations, and even bring a company down. Especially in the wake of the global financial crisis, many have strived to put in place more thorough risk-related processes and oversight structures in order to detect and correct fraud, safety breaches, operational errors, and overleveraging long before they become full-blown disasters.

Yet processes and oversight structures, albeit essential, are only part of the story. Some organizations have found that crises can continue to emerge when they neglect to manage the frontline attitudes and behaviors that are their first line of defense against risk. This so-called risk culture is the milieu within which the human decisions that govern the day-to-day activities of every organization are made; even decisions that are small and seemingly innocuous can be critical. Having a strong risk culture does not necessarily mean taking less risk. Companies with the most effective risk cultures might, in fact, take a lot of risk, acquiring new businesses, entering new markets, and investing in organic growth. Those with an ineffective risk culture might be taking too little.

Of course, it is unlikely that any program will completely safeguard a company against unforeseen events or bad actors. But we believe it is possible to create a culture that makes it harder for an outlier, be it an event or an offender, to put the company at risk. In our risk-culture-profiling work with 30 global companies, supported by 20 detailed case studies, we have found that the most effective managers of risk exhibit certain traits—which enable them to respond quickly, whether by avoiding risks or taking advantage of them. We have also observed companies that take concrete steps to begin building an effective risk culture—often starting with data they already have. more>

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Updates from McKinsey

Unlocking value: Four lessons in cloud sourcing and consumption
Companies that are successful in sourcing and managing the consumption of cloud adopt a more dynamic, analytical, and demand-driven mindset.
By Abhi Bhatnagar, Will Forrest, Naufal Khan, and Abdallah Salami – Cloud adoption is no longer a question of “if” but of “how fast” and “to what extent.” Between 2015 and 2020, the revenue of the big-three public cloud providers (AWS, Microsoft Azure, and Google Cloud Platform) has quintupled, and they have more than tripled their capital-expenditures investment to meet increasing demand. And enterprises are ever more open to cloud platforms: more than 90 percent of enterprises reported using cloud technology in some way.

These trends reflect a world where enterprises increasingly “consume” infrastructure rather than own it. The benefits of this model are plentiful. Cloud adopters are attracted by the promise of flexible infrastructure capacity, rapid capacity deployment, and faster time to market for digital products. The COVID-19 crisis has accentuated the need for speed and agility, making these benefits even more important. From an infrastructure-economics perspective, perhaps the most attractive innovation of cloud is the ability to tailor the consumption of infrastructure to the needs of the organization. This promises greater economic flexibility by transforming underutilized capital expenditures into optimally allocated operations expenditures.

While this concept is attractive in theory, many enterprises are facing challenges in capturing the value in reality. Enterprises estimate that around 30 percent of their cloud spend is wasted. Furthermore, around 80 percent of enterprises consider managing cloud spend a challenge. Thus, even though more than 70 percent of enterprises cite optimizing cloud spend as a major goal, realizing value remains elusive.

In our experience, a major driver of value capture is transforming the approach to sourcing and consuming cloud. Enterprises that approach this task with a traditional sourcing and infrastructure-consumption mindset are likely to be surprised by the bill. The flexibility to consume cloud as needed and cost effectively places responsibility on enterprises to maintain a real-time view of their needs and continuously make deliberate decisions on how best to adjust consumption. more>

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Updates from McKinsey

Optimizing water treatment with online sensing and advanced analytics
Overlaying real-time advanced analytics on data from online sensing can help to stabilize operations and increase capacity in water-treatment facilities.
By Jay Agarwal, Lapo Mori, Fritz Nauck, Johnathan Oswalt, Dickon Pinner, Robert Samek, and Pasley Weeks – Metals and mining companies are adapting to an operating environment in which water is highly regulated, experiences unforeseen supply shocks, and carries substantial social value. By 2024, water-operating expenses for these businesses are estimated to increase by a 1 to 4 percent compound annual growth rate (CAGR), with a 4 to 7 percent CAGR expected for water-capital spending. Consequently, these metals and mining companies have made significant investments—an estimated $15 billion in 2019 alone—to reduce water withdrawal and increase water efficiency in operations, as well as mitigate reputational risk.

Digital tools can optimize water-management operations—offering stability, reduced costs, and deferred expenditures for new capacity. This article describes the application of such tools in water treatment (see, “The five domains of water management”).

Central to sustainable operations is water reuse, wherein water is reclaimed after processing and treatment (to remove metals, reagents, or suspended solids). Reuse obviates the need for additional fresh water; it significantly reduces water-operating expenses and is critical to addressing low water availability in stressed areas. Anglo-American, for instance, has pledged to adopt techniques that will allow for more than 80 percent water reuse at their mining facilities, saving an estimated $15 million per year. more>

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Updates from McKinsey

Reimagining the auto industry’s future: It’s now or never
Disruptions in the auto industry will result in billions lost, with recovery years away. Yet companies that reimagine their operations will perform best in the next normal.
By Thomas Hofstätter, Melanie Krawina, Bernhard Mühlreiter, Stefan Pöhler, and Andreas Tschiesner – Electric mobility, driverless cars, automated factories, and ridesharing—these are just a few of the major disruptions the auto industry faced even before the COVID-19 crisis. Now with travel deeply curtailed by the pandemic, and in the midst of worldwide factory closures, slumping car sales, and massive layoffs, it’s natural to wonder what the “next normal” for the auto sector will look like. Over the past few months, we’ve seen the first indicators of this automotive future becoming visible, with the biggest industry changes yet to come.

Many of the recent developments raise concern. For instance, the COVID-19 crisis has compelled about 95 percent of all German automotive-related companies to put their workforces on short-term work during the shutdown, a scheme whereby employees are temporarily laid off and receive a substantial amount of their pay through the government. Globally, the repercussions of the COVID-19 crisis are immense and unprecedented. In fact, many auto-retail stores have remained closed for a month or more. We estimate that the top 20 OEMs in the global auto sector will see profits decline by approximately $100 billion in 2020, a roughly six-percentage-point decrease from just two years ago. It might take years to recover from this plunge in profitability.

At the operational level, the pandemic has accelerated developments in the automotive industry that began several years ago. Many of these changes are largely positive, such as the growth of online traffic and the greater willingness of OEMs to cooperate with partners—automotive and otherwise—to address challenges. Others, however, can have negative effects, such as the tendency to focus on core activities, rather than exploring new areas. While OEMs may now be concentrating on the core to keep the lights on, the failure to investigate other opportunities could hurt them long term.

As they navigate this crisis, automotive leaders may gain an advantage by reimagining their organizational structures and operations. Five moves can help them during this process: radically focusing on digital channels, shifting to recurring revenue streams, optimizing asset deployment, embracing zero-based budgeting, and building a resilient supply chain. One guiding principle—the need to establish a strong decision-making cadence—will also help. We believe that the window of opportunity for making these changes will permanently close in a few months—and that means the time to act is now or never. more>

Updates from McKinsey

Global emergence of electrified small-format mobility
Electric two- and three-wheel vehicles are gaining in popularity. What does the future hold for the market?
By Patrick Hertzke, Jitesh Khanna, Bhavesh Mittal, and Felix Richter – Inventors patented the first electric bikes back in the 1890s, but their innovations never garnered the same attention as other early-transportation milestones, including the first subways and the Model T Ford. Today, however, several trends have converged to bring e-bikes out of obscurity. Sales of electric vehicles (EVs) are increasing as governments crack down on emissions. Meanwhile, innovators have introduced new technologies and business models that are breathing life into the market for small-format EVs (those with two or three wheels). Improbable as it may seem, e-bikes could finally be having their day.

To gain more insight into the burgeoning market, we examined worldwide trends for small-format EVs, looking at both geographic growth patterns and the forces shaping the industry. Our analysis shed some light on strategies that can help OEMs and other players succeed as small-format EVs gain traction.

The sales figures for small-format EVs may initially seem modest. The market for two-wheel EVs (E2Ws) and three-wheel EVs (E3Ws) was valued at around $97 billion, or 4 percent of global auto sales. The sector has momentum, however, and global sales of E2Ws and E3Ws are increasing by more than 14 percent annually. (That figure excludes sales in China, which was an early adopter of small-format EVs and is thus experiencing slower growth.) By 2022, global sales of E2Ws and E3Ws could reach $150 billion.

It’s impossible to generalize about global sales trends, since transportation patterns and preferences vary widely by location, but some country-specific developments are striking. Take China: the country now accounts for around 30 percent of the global market for small-format EVs. What’s more, more than 80 percent of 2Ws in China are electrified, making it the dominant market by far in that category. The story may soon change, however, since growth of E2Ws is plateauing in China and surging in the European Union, Latin America, the Middle East and North Africa, and Southeast Asia.

India sells the largest number of E3Ws by far, and they now account for about half of all rickshaws in the country. By 2026, around 80 percent of 3Ws in India will be electric. One caveat: if more light commercial vehicles become electrified, they could become the default option for cargo transport, provided that their performance and economics improve.

Globally, we expect electrification to accelerate most quickly in the scooter and light-motorcycle segments. Electrification of heavy motorcycles will follow, but it won’t reach the levels seen with smaller vehicles. more>

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Updates from McKinsey

Many investments in digital farming have not fulfilled their full potential. What can companies do to improve returns?
Creating value in digital-farming solutions
By Shane Bryan, David Fiocco, Mena Issler, RS Mallya Perdur, and Michael Taksyak – Over the past 20 years, agriculture has undergone a digital revolution. It started quietly with original-equipment manufacturers that began to sell harvesters with guidance systems and auto steering, then roared to life in 2013 with Monsanto’s nearly $1 billion acquisition of the digital-agriculture company Climate Corporation. Since then, there has been an arms race within the industry, with billions of dollars invested and hundreds of millions of acres affected by digital farming.

The rapid pace of investment and broad adoption of digital technologies on the farm are a testament to the power of digital to reduce costs, boost yields, and put more money in the pockets of growers. However, despite the promise of digital-farming solutions, our research suggests that such investments have not lived up to expectations of the companies that made them. To explore why this might be the case and what could be done to improve outcomes, we conducted a survey of more than 100 industry executives from across the agriculture value chain.

For the purpose of this article, we define “digital farming” as any platform or application that processes input data to provide growers or crop advisers with agronomic decision-making support. These include proven digital offerings (such as variable-rate application) and ones that are more novel (such as in-season sensing). We excluded automation equipment, drones, and services that are not linked to agronomic decisions (for example, fleet-management software).

The survey found that most agriculture companies have invested in digital-farming solutions, but less than 40 percent of respondents (representing a broad swath of the industry) self-reported positive returns. To understand why, we tested a number of success factors, several of which dramatically increase perceived success. These standout factors include:

  • high attention from CEO and top team
  • clear strategy and business case linked to value creation
  • at-scale investment

About two-thirds of survey respondents indicated they had just one of these success factors in place; this suggests that the disappointing returns from digital-farming investments may be due to lack of adequate preparation. more>

Updates from McKinsey

Talent retention and selection in M&A
Retaining critical talent and ensuring the right people are in key roles are essential to a successful merger.
By Jocelyn Chao, Becky Kaetzler, Natashya Lalani, and Laura Lynch – An organization is only as good as its people, as the adage goes. At no time is that more true than during a merger integration. A deal can create an opportunity to upgrade talent across the organization; in some cases, gaining access to highly skilled employees is the primary reason for an acquisition. Conversely, mismanaging talent issues can seriously affect the success of even a relatively straightforward transaction.

Organizations undergoing a merger need to tackle two core challenges around talent: how to retain people critical to the combined company’s performance and how to manage the employee selection and appointment process in a way that causes the least disruption and anxiety. Thorough preparation and management of both processes is paramount to achieving a merger’s goals. This article presents our insights into talent issues that arise during M&A and how to handle them to foster a smooth transition.

Managing talent in a merger integration should not follow a one-size-fits-all approach. Rather, the type of deal you pursue needs to guide how you go about employee retention and selection.

In the case of two organizations of similar size coming together in an approximate merger of equals, both the acquirer and the target company need to pay close attention to retaining key talent. This type of deal often happens during industry consolidations or when a company is trying to reinvent itself by acquiring a competitor with complementary products and customer relationships. While leadership teams tend to protect their own core cadres and corporate cultures, the focus here needs to be on keeping the people best suited to driving the combined company’s performance. Accordingly, a fair and transparent selection process is needed to avoid (real or perceived) biases or favoritism on the part of either legacy company.

When a larger, often better-performing company acquires a smaller or lower-performing firm that operates within its core business, employee selection tends to favor the acquirer’s incumbent talent. In such cases, the acquirer’s retention focus may be quite narrow, aimed at the best performers or employees deemed critical for maintaining business continuity.

In an acquisition involving the entry into a new business or market, the buyer’s talent retention focus will likely be quite different. Typically, retaining the target firm’s employees is essential to the deal’s value, and there is usually limited overlap between the target’s workforce and that of the acquiring company, aside from support functions.

During the anxiety-filled period of merger negotiation and integration, talent deemed critical to the combined company’s future needs to receive special attention. Since talent flight can undermine performance, value creation, and both the near- and long-term success of the deal, organizations should develop talent retention plans as soon as possible—often before the acquisition is finalized.

The key steps in a talent retention program are determining its scope and approach, defining retention levers, and implementing and monitoring the results. more>

Updates from McKinsey

What it will take to create a more inclusive economy
By Liz Hilton Segel – What do we mean when we talk about building an inclusive economy?

An inclusive economy is fundamental to building a next normal after the COVID-19 crisis where we can thrive. It means creating an economy that provides opportunities to underserved people and communities; creates resilient, higher-wage jobs for workers; and ensures the mental health needs of people are met, enabling more productivity, greater personal and professional fulfillment, and many other benefits.

Businesses are facing a host of new challenges right now, and leaders in every industry have a full-slate of change on their agendas. But building an inclusive economy has never been more critical—and the time is now to embark on the journey. Here are three elements I shared with the FT that will help us along the way.

In a recent McKinsey survey of 800 executives in nine countries, 85 percent said their businesses have somewhat or greatly accelerated digitization during the pandemic, and nearly two-thirds reported that their companies have accelerated automation and artificial intelligence. To ensure this transformation doesn’t leave vulnerable workers behind, organizations must identify the skills their recovery business model depends on, then develop and scale tailored resources and programs to close any skills gaps among their employees.

These reskilling programs and workforce policies should be developed in partnership across departments and in tandem with industry leaders, business associations, educational, and social-sector institutions to build a better-prepared, resilient talent pipeline.

For instance, McKinsey recently joined the Rework America Alliance, formed by the Markle Foundation. The initiative will help millions of workers, regardless of formal education, move into good jobs in the digital economy by accelerating the development of a system of worker training that is specifically aligned to jobs that employers will need to fill. McKinsey is working to translate analytics into targeted guidance on reskilling opportunities, leading to better wages and better quality jobs. more>

Updates from McKinsey

How executives can help sustain value creation for the long term
Companies create more shareholder value when executives and directors concentrate on long-term results. A new report highlights behaviors that allow them to maintain a long-term orientation.
By Kevin Sneader, Sarah Keohane Williamson, Victoria Potter, Tim Koller, and Ariel Babcock – Ample evidence shows that when executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Addressing the interests of employees, customers, and other stakeholders also brings about better long-term performance. The future, it seems, should belong to leaders who have a long-term orientation and accept the importance of treating various stakeholders fairly

Nevertheless, our research shows that behavior geared toward short-term benefits has risen in recent years. In a recent survey conducted by FCLTGlobal and McKinsey, executives say they continue to feel pressure from shareholders and directors to meet their near-term earnings targets at the expense of strategies designed for the long term. Managers say they believe their CEOs would redirect capital and other resources, such as talent, away from strategic initiatives just to meet short-term financial goals.

Executives may continue to focus on short-term results because adopting a long-term orientation can be challenging. While previous studies have established that long-term companies perform better than others in the long run, they haven’t identified the management behaviors that enable that success. A new report, Corporate long-term behaviors: How CEOs and boards drive sustained value creation, represents our attempt to fill that gap. In it, we show that long-term companies adhere to certain management behaviors, and we recommend actions that CEOs and boards can take to institute those behaviors at their companies. more>

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