As companies emerge from the disruption of COVID-19, many are now reconsidering how their assets align with their core competencies. To better use capital and optimise their customer and shareholder value proposition, some are now looking to asset-light strategies to gain a competitive advantage and improve financial performance.
In a session at the 2021 AICPA & CIMA CFO Conference, executives from EY-Parthenon discussed how transferring ownership of certain assets and capabilities to better owners in the ecosystem could lead to better performance.
The benefits of an asset-light strategy
Also referred to as business model innovation or ecosystem innovation, an asset-light strategy entails transitioning noncore assets and capabilities to third parties in the broader ecosystem to increase the organisation's strength and focus on core capabilities, said Abhi Ahuja, senior director of Strategy and Transactions at EY-Parthenon. For example, an organisation may divest or transition its manufacturing operations, distribution, or tech development so it can direct more focus to branding, sales, and marketing — or vice versa.
These strategies, when carefully planned and executed, can reduce complexity, create new revenue streams, enhance innovation, and help drive a higher return on capital. A quarter of session participants who were considering an asset-light strategy said it was to drive innovation.
"What we are seeing is an imperative for innovation to release capital and better deploy it to [partners] who can successfully enable it and much faster," Ahuja said. Executives at all companies should ask themselves: Is my company's asset base agile enough to take advantage of marketplace shifts? And are we running out of time to extract value from our asset base?
In addition to traditional supply chain capabilities such as manufacturing and distribution assets, asset-light also encompasses other front-office capabilities such as sales operations and research and development, said Jeff Schlosser, US supply chain leader at EY-Parthenon. When polled on which functions in the value chain may be most suitable for an asset-light strategy, 40% of session participants chose enabling capabilities in IT, finance, HR, and real estate. Others indicated sales, marketing, customer experience, manufacturing, distribution centres, and reverse logistics.
Facing the need to preserve revenue and margin while reducing capital investment, many organisations now innovate through an ecosystem-based approach, Ahuja said. For example, Apple has grown consistently by creating a sustainable ecosystem around the consumer, looking to manufacturers like Foxconn to manufacture devices and developers for content and subscriptions. An EY-Parthenon poll of Fortune 500 companies found a strong correlation between asset-light business models and improved annual growth rates.
While asset-light strategies were becoming popular before COVID-19, they are now even more common since the pandemic, said Ken Koenemann, vice-president of TMB Consulting Group, who did not participate in the webinar. In addition to driving innovation, many are now minimising assets in their manufacturing and supply chains to focus more on core competencies such as sales, marketing, and service. "They're looking to smaller footprints in regional markets and outsourcing the manufacturing so they can reduce risk and don't have to worry about the manufacturing overhead," Koenemann said.
Planning and executing the transaction
While an asset-light strategy can create value and help reduce complexity, organisations must carefully consider the trade-offs between owning the assets themselves and transferring them to another party, Schlosser said. Companies typically begin their asset-light journey by identifying which assets and capabilities are core to delivering value to their customer base right now. An asset-light journey can take 12 to 18 months. However, a rapid four- to six-week effort to short-list target capabilities can enable companies to conduct an ecosystem scan for potential partners and build a business case.
Ahuja noted an example of a global consumer apparel company that exited the sales, distribution, and storage in one of its largest global markets. It then redeployed the unlocked capital to a partner network and direct-to-consumer fulfilment to get to market faster.
In another example, a leading US retailer realised its limited talent base couldn't help it keep pace with technology disruption. Rather than attempt its own innovation programme, it moved many IT support operations to the cloud and partners. "There are a number of nontraditional players moving into the space to become the recipient of the needed service, making it even more attractive to the current owner of a particular environment," Schlosser said. "There are too many good alternatives in the marketplace."
While an asset-light strategy can involve outsourcing, it more often includes the divestiture of assets through transactions like partnerships, joint ventures, or spinoffs. Decision-makers must understand the importance of the capabilities to the customer and the company. It's best to stay close to the original equipment manufacturer where importance is high for both and look to outsourcing when that capability is low in importance for both, Schlosser said. "We have yet to find an industry or sector where we can't find a benefit when we look at those capabilities," he said.
Driving long-term shareholder value
Despite the opportunities, organisations often find it challenging to shake up their existing business models and move to an asset-light strategy. Forty-five per cent of participants in the webinar said internal stakeholder alignment was their biggest barrier to taking the leap. Others said it was finding the right partner, structuring the deal, or determining long-term governance.
To overcome these barriers and attain a better long-term view, organisations should start by reviewing their capital allocation strategy, Schlosser said. Going through a process to segregate core and noncore assets and capabilities will help them identify where to drive more focus. "To do that analysis and get to that point where you have mapped your overall assets is an activity that every company should be doing. Whether or not there are transactions that come out of that is going to be dependent on the outcome," he said.
— Craig Guillot is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.