Steps to success for back-office digitalization
February 18, 2022
February 18, 2022
Chemical companies’ net-zero targets, whether driven by government demands or customer preferences, will require new investments across the full chemical value chain. Maximized cost efficiency in back-office functions will be key to freeing up funds to finance those investments while maintaining profitability.
With the need to fund net-zero initiatives, rapid back-office transformation at scale and fast results are more important than ever. Of the two principal cost-reduction levers—labor arbitrage and productivity improvement—most chemical companies have already achieved much of the potential benefit of labor arbitrage by shifting service delivery to low-cost countries. That means that looking ahead, the benefits from further labor arbitrage may decline within the existing scope.
On the other hand, there is significant room for improvement in productivity through increased digitalization. Indeed, based on our experience and research, the chemical industry has barely started to capture these benefits. That is clear from the manual effort, large number of physical documents and extensive human interactions found in their operations. Compared to consumer-focused e-commerce companies, for example, the use of digital technologies by chemical companies has been relatively low. (Figure 1) Thus, there is a tremendous opportunity to take advantage of fully digitalized processes and documents with information that’s directly usable in subsequent processing—including no-touch processing, human-machine interactions, self-service capabilities and the use of artificial intelligence (AI) to provide automated insights from these processes.
Figure 1: Digital level vs. average cost per FTE
The “what” of the issue—the desired target state for digitalization—is fairly clear. The question then, is “how” to achieve that target state. In general, there are three options:
1. Captive transformation, led and operated by the chemical company itself.
2. Full-fledged partnering, where processes are optimized and operated by a partner, typically under five- to seven-year contracts.
3. “Build, operate, transfer back” arrangements, in which a partner optimizes processes and then transfers them back to the owner—usually after two to four years.
The choice of options depends on several factors: the necessary management resources and attention; the desired time to benefit; the required certainty of achieving the targeted outcomes; the sustainability of results; and, finally, critical mass and the availability of expertise. Regardless of the implementation path selected, significant increases in digitalization will always require transformational change and investments across the company, affecting not only the back-office, but also other functions.
What is required for a successful and impactful back-office digitalization program? To answer this, we analyzed 10 back-office digitalization and transformation programs conducted in the last three years.
Digital winners proactively address several key success factors that allow them to move ahead quickly and effectively.
Success factor #1: Know exactly where the pain and value are coming from by ensuring a transparent view on effort drivers, digital levers and potential solutions.
Whether it’s a business unit, division, service or process area, there will be only a limited number of effort drivers. However, to develop a clear understanding of what to solve for, these drivers need to be understood, qualified and quantified in detail. (Figure 2)
Figure 2: Sample manual effort drivers
Process or task mining can provide some clarity on effort drivers. However, our experience shows that it is critical to perform a full end-to-end effort-driver assessment and understand from where the pain is emanating. A common misconception is that working along the classical end-to-end processes is sufficient, but a perspective across processes is needed as well, because more than 40% of effort might come from other processes and interfaces. For example, the hire-to-retire process requires information about provisions and accruals, which affects the record-to-report process. Thus, effective full digitalization requires that view across processes.
Solving for pain points is one way to create value, but designing for new capabilities can complement those efforts—a fact that is often lost in digitalization discussions. For example, substantial value can be added by extracting more insights from data or linking the back-office to the front-office to feed insights from buying and price patterns into recommendations for interactions.
With a detailed perspective on the pain points and the desired future capabilities, companies can be more effective in applying four digitalization levers:
1. Digitalize documents: Moving from documents to data (digitalizing at the source) using optical character recognition, natural language processing, etc.
2. Automate manual labor: Reduce human effort by using end-to-end automation platforms, system integration layers, robotic process automation (RPA), in-ERP workflows, etc.
3. Extract better insights: Deliver the right insights in an automated fashion to support decision-making by applying AI, machine learning, etc.
4. Improve human-machine interaction: Move to self-service and portal solutions using enablement platforms as well as digital service and collaboration platforms, etc.
As for digital solutions, there are many that might help address back-office pain drivers. But only a few are mature enough and will really ensure full end-to-end scope coverage, provide the necessary flexibility and scalability, and have a proven impact. Our experience shows that companies should not be overwhelmed and instead focus on a few good solutions—on average, four per service area (e.g., finance, HR, procurement).
Success factor #2: Scale before scouting new solutions, applying and defining “fit for purpose” criteria and ensuring harmonized architecture.
The scalability of existing solutions should be assessed before new solutions are scouted so that companies don’t just end up in pilots. An international chemical company executive recently explained that “we have various customized solutions across business units in place providing the same functionalities that could have been covered by another solution. We missed the opportunity to scale solutions.” In our research, 7 out of 10 of the interviewed chemical companies did not think about scaling existing solutions first or have only partly performed an assessment of existing solution scalability. As a result, many ended up unnecessarily increasing the application list and the associated support and maintenance costs. Typically, just 45% to 55% of digitalization initiatives are based on the scouting of new solutions.
Companies will typically use a pilot or proof of concept for a new solution, but that often results in a solution that does not scale and is quite individualized, which can end up creating increased resistance to digitalization. Based on our experience, “field testing” is more effective—that is, selecting a scalable and basic “fit for purpose” solution using the defined scouting criteria (e.g., definition on what to solve for, size of investment, payoff needed).
It is also important to maximize the scope of the solution in four dimensions: processes (applying solutions across end-to-end processes such as record-to-report, order-to-cash, purchase-to-pay); services/functions (reporting services, document management/archiving services); technologies (natural language processing, machine learning, RPA); and technology layers (from front-end to back-end).
Too often, companies will spend several weeks, if not months, on scouting. However, the use of solution databases that map pain points and desired target states can often reduce this to just one or two weeks, which means that validation by demos and field tests can be started sooner rather than later.
Digital transformation programs are not just about implementing technology. They need to be strategically driven and interlinked with process optimization and data harmonization efforts.
Success factor #3: Build a flexible and seamlessly integrated end-to-end technology architecture.
Most chemical companies still operate highly customized legacy architectures with the portion of custom code often reaching 60% to 70%. At the same time, there is the foreseeable migration to SAP S/4HANA. As a result, the digital decoupling of legacy architectures and back-office digitalization solutions is critical, so that satellite systems and add-ons can provide flexibility, scalability and agility. This also allows for a top-down project approach—setting a clear standard first and then only asking for grounded business exceptions, rather than extensive and time-consuming bureaucratic design exercises. Our research shows that 70% of digital value is enabled by using flexible satellite systems and add-ons while adhering to standards.
However, this should not just be about implementing technology: Digital transformation programs need to be strategically driven and interlinked with process optimization and data harmonization efforts. Our experience shows that digital programs that do not consider those factors have a 24% higher transformation cost and 12% higher support and maintenance cost afterwards. And back-office digitalization efforts done in concert with process optimization and data harmonization achieve automation levels of more than 80% on average—25% to 35% higher than efforts that do not include those factors.
Furthermore, the awareness of common prerequisites (e.g., reporting structure standardization; reduction and harmonization wage types and bank accounts; application and infrastructure rationalization) needs to be addressed early on and sharpened. In addition, top management needs to act as sponsors and provide guidance—early and often.
Chemical companies can add significant value with digitalization that is derived from and incorporates strategic business objectives. On average, cost reductions of approximately 30% to 40% can already be achieved today. In addition, digitalization in those cases also helped increase service quality (e.g., with guided buying and HR self-service/self-enablement platforms) and had a top-line impact through the enablement of new business models, for example. On average, we see an 18-month payback on most platform-driven digitalization initiatives.
The methodology, approach and technical solutioning for back-office digitalization need to be complemented by “people” initiatives covering both the soft and hard sides of change. In the end, line managers need to be incentivized and convinced to handle the same workloads at the same, if not higher, quality with a fraction of the former resources. Our research and experience with digital transformation programs show that companies that don’t achieve the expected results typically lack rigor in setting targets and incentives, speed in decision-making and capability building, and last but not least, an ability to break with established silos, beliefs and ways of working.
Given the need to maximize cost efficiency, the massive potential benefit and the speed with which value can be realized, we believe that chemical companies can see substantial benefits from back-office digitalization at scale. It is time to get started now.