Cost reduction can only go so far and the outlook for sales uplift from traditional means is gloomy – so turn a cost base into a revenue centre.

Context

‘Commercialisation’, the process of transforming cost centres into revenue generating businesses, is by no means a new practice but is one that is being adopted by more and more organisations looking to capitalise on existing capabilities and create new revenue streams.

There have been several examples during the past 10-15 years of companies building centres of excellence in-house and then spinning them off into distinct commercial entities. Genpact was established by GE in 1997 and then separated as an independent company in 2005. Similarly, WNS began as British Airways’ back office operations in 1996 and moved from being a captive to a third-party BPO provider in 2002.

In the last few years, service providers, consultancy firms and financial services organisations have acquired successful commercialised entities as a route to expand their service offerings. Examples include Wipro buying the Citi data centre in Dusseldorf and IBM acquiring National Australian Bank’s main data centre in Melbourne. TCS acquired Unisys Insurance Services in 2010 and HCL acquired Axon in 2008 giving them former excellent SAP capabilities. Most recently Tanfeeth, a fully owned subsidiary of Emirates NBD, was established and is the first shared services organisation in the UAE.

Elixirr has also observed a growing appetite among our clients to explore this route. Our clients are looking to ‘in-source’ volume via commercialising internal capabilities in the marketplace as a way of generating savings on fixed cost bases (e.g. banks providing processing services to other banks). We are currently supporting several clients on the journey to commercialisation, and each of them is at a different stage of this journey. This ranges from commercialising specific elements of a group shared services function (such as “Know Your Customer”) through to bulk printing.

Why Now?

Given the increasingly competitive economic climate and continued demands for cost reduction, now is the time for innovative companies to look to commercialise their assets, possibly partnering with service providers or competitors to create industry utilities. One example of a service provider who has looked to support companies in the commercialisation of their assets is Xchanging, which entered into a partnership with Lloyd’s of London in 2001 to commercialise their claims office. It then signed similar partnerships with Deutsche Bank in 2004, Aon in 2006 and Allianz GI in 2007.

Many organisations have exhausted tactical cost savings in the extended economic downturn and it is now extremely difficult to ‘squeeze out’ additional cost savings without impacting the quality of service delivery and potentially doing more harm than good. In addition, given the current economic climate, a revenue upside from an increase in sales through existing offerings looks exceedingly difficult to realise.

Commercialisation therefore provides a smart alternative for organisations looking to increase their revenues and also create an asset which in the longer term could prove extremely valuable. One of the routes to the creation of such an asset is through partnering with outsource providers, and this provides a unique opportunity for organisations who have already established long-standing relationships with such providers. These organisations not only have an in-depth understanding of what constitutes good service provision, they are also able to leverage the existing relationship with their outsource provider to help create the asset and leverage their existing sales and distribution channels.

Commercialisation can also offer job security to your own workforce, by ‘insourcing’ additional workload, thus absorbing increased capacity and reducing processing cost per unit. In addition, with todays’ communication infrastructure you do not need to be on the same site or even time zone as your eventual client or customer. Greater automation, and as a consequence process standardisation, have introduced the opportunity to commercialise the more commoditised operational processes.

Finally, direct ownership or association with a successful commercialised enterprise typically creates positive market perception of the ‘parent’ or ‘founding’ company.

How do we make this a success?

The decision to pursue commercialisation is a major one for any organisation, often requiring significant investment up front, and can be difficult to reverse. While success can never be guaranteed in major strategic decisions, having the following checks in place can help an organisation avoid surprises and pitfalls down the road:

  • Understand market demand and act now in order to capitalise on first mover advantage
  • Provide a differentiated and unique offering
  • Where a 3rd party is involved ensure an optimal deal structure: keep it as simple as possible – complex JVs might not be the best approach
  • Test the concept with something manageable that you know well – better to go through the learning curve with familiar subject matter and a well-defined scope
  • Ensure that the new venture is discrete from any existing outsourcing relationships
  • Implement mechanisms that provide customers with the level of service they would expect from an external supplier
  • Have a clearly defined exit strategy – whether this is selling-off the asset, buying-out a partner or reintegrating the asset into the parent company

In Conclusion

The current economic environment lends itself to the exploration of innovative methods of revenue generation. Undertaking the commercialisation journey provides organisations with a new source of revenue in the short term, and allows them to create an asset which they can sell a few years down the line during the economic upturn.
Many organisations are on this commercialisation journey; however there is still a window of opportunity to reap the benefits of such a venture providing you have a genuinely differentiated proposition, set out a clear strategy and plan appropriately.