Monday, September 8, 2014

Adding IT Value to Evolving Business Models

Executive Summary:
Change has become the new normal across industries. The healthcare industry is dealing with changing market dynamics and is only now realizing the full impact of the Affordable Care Act. The financial services sector is facing growing regulatory challenges on one side and the opportunities offered by the recovering global economy on the other side. The US retail and B2B banking sector is under the impact of changing customer preferences vis-à-vis mobile banking. US Retailers are also dealing with domestic “low price” challengers and the avenues offered by the investment opportunities in the emerging economies, especially in the e-commerce sector. Manufacturers have the need to optimize the production and supply chains in order to lower costs. This article explores how effective IT decision making could help firms deal with the constant flux in their business models.

The market dynamics in healthcare is changing, as the firms involved understand the true impact of the Affordable Care Act. There is increased competition because of insurance exchanges and the existing market shares are being disrupted (see exhibit 1).The reimbursement models are being updated, the healthcare networks are evolving and the Medicare market is expanding as more baby boomers retire. Hospitals are revamping their service delivery models to better improve patient outcomes and insurance companies (payers) are trying to negotiate better contracts with hospitals (providers) and formulate the most optimal benefit plans for patients. Under such a scenario, it’s critical for both the payers and providers to understand the evolved preferences of the old and new clients/customers. Do customers prefer a high deductible plan with wide coverage or a low deductible plan with narrow coverage? What type of group insurance are the employers demanding with geographically diversified work force? Are more employees telecommuting to work and if yes, have their insurance needs changed?

The second key aspect is to re-evaluate the firm’s business value. How can I drive better business value in the changed landscape? Are we targeting the correct market segment? Are our plans/benefits still relevant? Are our claim adjudication systems capable of meeting the new SLA’s? After deliberating on the above questions, the firms have to assess the capabilities that need shoring up. Creating a rules based, flexible reimbursement, network, contract and benefit management systems and having a better control of the business processes by automating them will help the insurance companies. Since the changes are continuous, it’s beneficial to set up a Service Oriented Architecture within the enterprise and better integrate the disparate source systems. Firms can deal with changes better when a service oriented enterprise is created.

Exhibit 1:
Financial Sector:
As the global economy recovers from the financial crisis of 2008, it presents both challenges as well as opportunities. Various regulatory requirements put in place such as Basel III, Dodd Frank Act, Simpson-Bowles Plan etc., to prevent a repeat of the financial crisis force significant changes to the business model of the financial firms. A KPMG study on the impact of regulations on the financial services sector predicts a high impact on the net income of the firms (See exhibit 2). With these regulatory changes, firms have to update their IT systems to better capture critical data. Firms are better off undertaking an effort to optimize their IT infrastructure, overhauling their enterprise application security, enhancing their digital user experience interfaces to capture additional data and migrating and modernizing their IT applications. These efforts could be staggered to prevent disruptions to the everyday business but are very critical to effectively comply with regulatory requirements. 

The recovery of the global economy also provides new opportunities for growth to the sector. As new business models are discovered and new market segments identified, the firms have to put in place business processes and rules to capture those segments. Digitizing business processes and rules gives better control to the firms and the required flexibility to deal with any future changes.

Exhibit 2:  

The new retail and B2B banking customer is increasingly conducting his/her transactions via the mobile application. As per a McKinsey & Co survey, today 65 percent of customers interact with their banks through multiple channels. Human interactions are generally reserved for more complex problems: only 25 percent of agent phone calls are inquiries that could be serviced in other channels. Banks that do not provide the seamless banking experience to customers across various channels – branch, mobile and web – risk the possibility of losing out the customer’s business to other banks that provide a seamless experience. Effective mobile strategy that provides banking value to the customer and also provides banks an ability to cross sell products to the consumer similar to a physical branch is needed. Banks need to adopt cloud mobile development platform such as IBM Worklight to quickly create mobile applications and roll it out to the end consumer.

In a B2B setting, banks that can quickly set up new accounts and add/update financial products to the banking business customer can capture additional market share. The sales representatives should be able to present the product information and capture customer information on a tablet. Designing and selling new financial products that offer convenience to the businesses will provide the competitive edge to the banks.
US retailers are being challenged over price by “online only” retailers such as Amazon and other competitors that are offering e-commerce channel. The retailers are struggling to reduce high costs due to big investment in stores. A key method to reduce high inventory costs is to have an integrated supply chain visibility and to be able to sync the merchandize ordering with that of supplier inventories. Also retailers can no longer have fulfillment channels in silos. There is a need to integrate the fulfillment channels and provide visibility across – a consumer should be able to add a desired product to their wish list on the website, review that product in store, purchase the product in store or place an order online and receive the product. The product return procedures should be similar irrespective of where the product was purchased. In order to provide the new business value, the retailers need to transform the customer digital experience, better integrate their source systems and modernize their IT applications by moving them into new platforms.

 E-Commerce provides an exciting opportunity in the emerging markets. As per RESEARCHANDMARKETS study, the e-Commerce industry in India is expected to grow at a CAGR of 40%, from US $ 5.9 billion in 2010 to US $ 34.2 billion in 2015E. An India based e-Commerce retailer, Flipkart, recently raised $1 billion in fresh funding. Amazon is increasing its presence in India as well. The emerging middle class of the developing economies provides a huge opportunity for the retailers. The new consumers with disposable income favor purchases of latest technology products, mainly electronic goods, over the internet. There is a significant margin that could be captured here. These new markets provide additional area of growth for those retailers with global ambitions. The retailers should fortify their e-commerce offerings and build a strong supply chain integrated with their e-commerce sites both over the web and mobile. The proliferation of smart phones in emerging economies also provides a huge opportunity in the m-commerce space. The mobile development strategy is critical to capture this opportunity.
With increased competition from global competitors, US manufacturers face a growing need to optimize production and reduce costs. It is more critical than ever to identify the core strengths in manufacturing and outsource any parts that are better off supplied by a supplier with a low cost. The manufacturers need to constantly evaluate available supply chain options and choose the most cost effective option. As per a KPMG survey, many manufacturing executives (49 percent globally; 54 percent U.S.) admit that their companies currently do not have visibility of their supply chain beyond Tier 1 suppliers. Moreover, only 9 percent of the 335 global respondents of the 2013 KPMG survey say they have complete visibility of their supply chains. This number is even lower among U.S. executives, with only 7 percent claiming complete supplier visibility (see exhibit 3). Adopting a robust Business Analytics and Decision Management solution is a key lever in the changed landscape. Using a business analytics and reporting software such as IBM Cognos provides the manufacturers with access to real time data on production capacity, inventory management, supplier inventories, budgeting, forecasting etc., so that  more informed decisions could be made.

Exhibit 3:

While updating the business model to better deal with the changing landscape is a challenge, overhauling and effectively implementing an IT ecosystem will help smooth the journey to a great extent. Taking the help of advances in IT will help to reduce the productivity disruptions caused while modifying the current business model. Choosing a trusted IT business partner that can provide holistic IT services will also go a long way in alleviating this pain.

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N.R. Vijay is a Solution Architect in the Business Process Management division of Prolifics. He has over 10 years of consulting experience across domains such as Retail, Healthcare and Banking. Specializing in technology, management concepts and enterprise strategy, he is focused on change management and process improvement initiatives. He co-authored a whitepaper titled "Improving Customer Loyalty through Business Process Optimization and Advanced Business Analytics"