Strategy of Finance – Details, episodes & analysis

In this episode, Michiel de Bruijn, a procurement lead at Bloomreach, shares his journey in the field of procurement and discusses the challenges and strategies involved in software procurement. He highlights the importance of understanding the specific needs of the business and aligning procurement objectives with overall business goals. Michiel also emphasizes the significance of cost reduction, turnaround time, and compliance in procurement. Additionally, he explains the complexities of cloud procurement and the need for benchmarking and understanding the metrics and criteria of different cloud providers. Michiel also highlights the need for compliance and privacy considerations when dealing with AI applications. The future of procurement, according to Michiel, lies in direct access to data, community platforms for sharing experiences, and aggregator platforms for standardized pricing and contract terms. He advises aspiring procurement professionals to gain experience through internships and to reach out to industry experts for guidance.

Takeaways

- Align procurement objectives with overall business goals

- Focus on cost reduction, turnaround time, and compliance

- Understand the complexities of cloud procurement and the need for benchmarking

- Software procurement requires Apple-to-Apple comparisons and benchmarking

- Benchmarking is crucial in procurement to ensure fair pricing and transparency

- Compliance and privacy considerations are essential when dealing with AI applications.

- Managing a multifunctional procurement process requires prioritizing risks and customizing the process accordingly.

- Optimizing software contracts involves understanding the scope, documenting requirements, and tracking savings.

- The future of procurement includes direct access to data, community platforms for sharing experiences, and aggregator platforms for standardized pricing and contract terms.

- Aspiring procurement professionals should gain experience through internships and seek guidance from industry experts.

- Success in procurement is defined by making small daily impacts, enjoying the work, and continuously learning and adapting to new challenges.

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Quotes

“Procurement is still such an undersold profession.”

“The great thing about the profession is that everything I do is with people, for people, and yeah, so it's very people-oriented.”

“Ironically… every crisis for procurement is a good one because like suddenly procurement gets a voice.”

“[Cloud spend is] way more about utilization, and optimizing utilization and infrastructure versus the actual negotiation.” 

“Without benchmarks, you're just kind of standing out in the street naked.”

“[As a negotiator] don't change too far away from your personality.”

“You're not negotiating with another company, you're negotiating with a person.”

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Where to find Michiel de Bruijn:

LinkedIn:  https://www.linkedin.com/in/meldebruijn/

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Where to find Bloomreach:

Website:  https://www.bloomreach.com/en

In this conversation, Srini Phatak, the Deputy CFO and Controller at Unilever, shares his journey and insights as a finance professional. He discusses the importance of experiencing different parts of the world and embracing middle-class values. Srini also highlights the compelling combination of hunger, humility, and the art of the possible that drives Indian executives to succeed. He emphasizes the significance of trust, confidence, and meritocracy in career progression.

Srini provides valuable advice on managing multinational companies, including the importance of understanding the business, people, and culture, as well as making choices and simplifying operations. He also discusses the role of the CFO and the finance function in delivering value creation and sustainable cash flows. The conversation with Srini highlights the importance of focusing on key drivers of business success, such as growth, profit, and cash. He emphasizes the need to go beyond just focusing on outcomes and instead focus on the enablers of those outcomes, such as volume growth, penetration, consumption, and premiumization.

Further, Srini discusses the importance of managing risk and making winning choices in business strategy. He explains that risk management is not restrictive, but rather a growth enabler. Additionally, Srini shares insights on organizational design, talent management, and the role of finance in driving value creation. Srini also talks about the importance of understanding consumer habits and preferences in the CPG industry and how they influence brand strategy and innovation. He shares insights on building a strong organizational culture and the balance between global and local cultures. Srini defines success as creating an impact in the business and with people, making a difference in external communities, and making suitable work-life choices.

Takeaways

- The combination of hunger, humility, and the art of the possible drives Indian executives to succeed.

- Trust, confidence, and meritocracy play a crucial role in career progression.

- Understanding the business, people, and culture is essential for managing multinational companies.

- Making choices, simplifying operations, and delivering value creation and sustainable cash flows are key responsibilities of the CFO and the finance function. Focus on the key drivers of business success: growth, profit, and cash.

- Identify and focus on the enablers of the outcomes, such as volume growth, penetration, consumption, and premiumization.

- Risk management is not restrictive, but a growth enabler.

- Make winning choices in business strategy by considering the opportunities and risks involved.

- Finance plays a crucial role in driving value creation by providing a holistic view of the business and being a co-pilot to business partners.

- Attract and retain talent by offering challenging opportunities, personalized development plans, and a stimulating work environ...

In the dynamic realm of Software as a Service (SaaS), the pursuit of high EBITDA margins often sparks extensive debate among industry professionals. The question at the heart of this discourse is whether the widely coveted 30% EBITDA margin is a tangible goal or merely an elusive mirage. This discussion unfolds against a backdrop where SaaS markets do not typically produce a singular dominant player but do grant substantial value to market leaders.

The Dream of High Margins in SaaS

The allure of achieving a 30% EBITDA margin is not unfounded. It stems from the understanding that SaaS, with its recurring revenue model and potential for scalability, inherently offers the promise of robust margins. However, the path to realizing these margins is fraught with challenges, including operational inefficiencies, market misalignment, and the strategic decision to reinvest in growth.

Growth vs. Profitability: The SaaS Dilemma

The core of the matter lies in the delicate balance between maintaining growth and achieving profitability. It's posited that high profitability, especially margins as ambitious as 30%, might necessitate a slowdown in growth for medium-sized and semi-mature SaaS businesses. This trade-off emerges from the strategic choices companies face: reinvest earnings to fuel growth or prioritize immediate profitability.

Historically, SaaS businesses have leaned towards reinvestment, driven by the belief that the value derived from growth exceeds the immediate returns from high margins. This approach is underpinned by the sector's overall positive outlook, encouraging companies to double down on expanding their market presence and product offerings.

A Closer Look at Real-World Examples

By examining real-world scenarios, such as companies that have managed to strike a balance between growth and positive EBITDA margins, it becomes evident that high profitability is not entirely out of reach. However, this balance is often a result of strategic decisions that prioritize long-term growth over short-term profitability metrics. The critical consideration is whether aiming for high margins would deter a company's ability to innovate and compete, especially in a landscape that continually evolves with advancements in technology.

Investor Expectations and Strategic Decision-Making

Investor influence plays a significant role in shaping the strategies of SaaS companies, particularly public ones. The pressure to meet quarterly expectations can sometimes skew priorities towards short-term gains rather than long-term viability and market leadership. This tension between investor expectations and strategic long-term planning highlights the complexity of navigating the SaaS business environment.

The Imperative of Continuous Innovation

The conversation also underscores the importance of continuous investment in research and development. Staying at the forefront of technological advancements—be it through AI, cloud computing, or other emerging technologies—is paramount for sustaining growth and remaining competitive. The necessity of balancing capital allocation with the imperative to innovate presents a perennial challenge for finance and strategy professionals within SaaS organizations.

The Role of Finance in Shaping SaaS Success

Finally, the role of finance in evaluating and guiding investment decisions towards high ROI projects is crucial. The collaborative efforts between finance and other departments, such as product development and strategy, are vital for crafting scenarios that maximize both growth and profitability. This multidisciplinary approach is essential for navigating the uncertainties of market demand, technological shifts, and competitive dynamics.

Conclusion

The pursuit of 30% EBITDA margins in the SaaS industry is a complex endeavor, intertwined with strat...

In this insightful podcast clip, Srini Phatak, Deputy CFO and Controller of Unilever, shares his personal definition of success and offers practical advice on how to achieve it. Srini emphasizes that success is not solely defined by titles or salaries but by the impact you create in your business and with the people around you. He discusses the importance of balancing work and personal life, managing energy and emotions, and embracing challenges and setbacks. Whether you're an emerging professional or a seasoned leader, Srini's wisdom provides a valuable roadmap for a fulfilling and impactful career. Tune in to gain a deeper understanding of what true success means! #Success #CareerAdvice #Leadership #Podcast

In this insightful podcast clip, Srini Phatak, Deputy CFO and Controller of Unilever, shares his expert advice on how to succeed in the world of finance. Discover the four key roles every finance professional must master: Strategist, Catalyst, Operator, and Steward. Learn why adaptability, strategic thinking, and strong leadership are essential for climbing the corporate ladder in finance. Tune in to gain valuable insights on making a significant impact in your finance career and standing out as a leader. Don't miss this opportunity to learn from one of the industry's top experts! #Finance #CareerSuccess #Leadership #Podcast

In this episode, Harsh Joshi, founder and CEO of DAO Studio, discusses artificial intelligence (AI) and its applications. He shares his background in the AI space and the projects he has worked on. Harsh explains that AI is the process of making a system learn certain behaviors and respond accordingly. He discusses the integration of hardware and software in AI systems and the importance of neural networks as function approximators. Harsh also touches on the concepts of pre-training and fine-tuning in AI models, as well as the use of large language models (LLMs) and diffusion models for image and text generation. He explains the role of RAG (retrieval augmented generation) in AI architectures and the challenges of prompt engineering, MLOps, and AIOps. The adoption of AI in businesses is still limited due to several reasons, including controllability, explainability, and decomposability. These fundamental problems hinder the ability to ensure quality assurance, governance, and liability. Privacy is another concern that businesses struggle with when deploying AI systems. Open source models are gaining popularity in the AI space because they provide transparency, collaboration, and the ability to iterate and improve. However, open source initiatives by big corporates are driven by economic opportunities rather than social benefits. The deployment of AI at scale requires a collaborative approach involving subject matter experts, product teams, software engineers, and finance teams. YOJN.ai, a product by DAO Studio, aims to simplify AI deployment, improve transparency, and provide control and fine-tuning capabilities. CFOs and finance teams can benefit from YOJN by gaining better visibility into costs, returns, and modeling, as well as ensuring transparency in pricing and deployment.

Takeaways

- AI is the process of making a system learn certain behaviors and respond accordingly.

- Neural networks are used as function approximators in AI systems.

- Pre-training and fine-tuning are techniques used in AI models.

- Large language models (LLMs) and diffusion models are used for image and text generation.

- RAG (retrieval augmented generation) is a technique used in AI architectures.

- Controllability, explainability, and decomposability are fundamental problems that hinder the adoption of AI in businesses.

- Privacy is a concern for businesses when deploying AI systems.

- Open source models are gaining popularity in the AI space due to transparency, collaboration, and the ability to iterate and improve.

- The deployment of AI at scale requires collaboration between subject matter experts, product teams, software engineers, and finance teams.

- YOJN.ai simplifies AI deployment, improves transparency, and provides control and fine-tuning capabilities for CFOs and finance teams.

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Quotes

"AI is more of a marketing term, but if you think about it, it's about making systems learn behaviors and respond to stimuli."
 
"When you talk about artificial intelligence, it’s all about making systems intelligent and the challenge is, can these systems self-learn?"
 
"The AI systems that are all the rage today, which scale well and generalize well, are neural networks, which are essentially function approximators."
 
"The whole idea of thinking hardware separate, software separate doesn’t really make sense when you’re talking about artificial intelligence."
 
"The magic of AI lies in its ability to approximate functions and form decision boundaries within data."
 
"Prompt engineering is a field that's gonna go away as fast as it has come."
 
"I don't think prompt engineering actually moves any significant needle."
 
"T...

Rocky Lalvani, an advisor to small and medium-sized businesses, shares his insights on the Profit First method and how it can be applied to businesses of all sizes. He emphasizes the importance of focusing on profitability and making profit a driver rather than an afterthought. Lalvani explains that Profit First involves allocating money for specific purposes, such as profit, owner's pay, taxes, and operating expenses. By doing so, businesses can ensure that they have the cash flow to support growth and make informed investment decisions. He also highlights the need to measure and track the return on investments and the importance of understanding the cash flow implications of scaling a business. Lalvani also highlights the need for entrepreneurs to make hard choices and let go of employees or projects that are not driving profit. He explains how these principles can be applied in different business situations, including during market dislocations or crises. Additionally, Lalvani discusses the intersection of spirituality and business, emphasizing the importance of living in alignment with one's beliefs and values.

Takeaways

- Profit should be a driver in business, not an afterthought

- Allocate money for profit, owner's pay, taxes, and operating expenses

- Measure and track the return on investments - Understand the cash flow implications of scaling a business Focus on profit from the start and manage cash flow effectively

- Make hard choices and let go of employees or projects that are not driving profit

- Apply profit first principles in different business situations, including during market dislocations or crises

- Explore the intersection of spirituality and business and live in alignment with one's beliefs and values

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Quotes

“I think in many cultures, people don't talk about money. It's a taboo subject. People don't ask questions about money.”

“I was shocked to learn that business owners were really bad with money.”

“I don't believe in grinding it out.”

“As a kid, I just knew I wanted to be wealthy. And so I would read and learn and figure stuff out.”

“Why don't we do sales minus profit equals expenses. Now, profit is the driver and we constrain our expenses.”

"Profit First makes sure that the taxes are there, the profits there, your pay is there, and that you're appropriately taking the right amount of money out of the company."

"Growth requires cash. And if you don't know how much cash you need to grow your business, you can grow your business and quadruple it and run out of cash."

“Most bookkeeping is not up to date. It's always behind... So this bank account shows you how much cash came in. And at the end of the day, that's what matters.”

“Business owners are resourceful. The problem is they're also lazy.”

“The problem is the P&L doesn't equal cash.”

“Wealth is built on the balance sheet and it's an area nobody talks about.”

“Hoping and dreaming are not profit levers.”

“One of the top reasons for bankruptcy is scaling and growth.”

“As long as cash is flowing, you can keep going.”

“Everyone wants complicated solutions… Just do si...

In this engaging conversation, Tim Smith, a renowned expert in pricing, delves into the critical role of pricing as a strategic imperative for companies. He shares his personal journey into the field, highlighting key milestones that have shaped his distinguished career. Tim addresses common pitfalls that companies encounter in their pricing strategies and underscores the necessity of strong leadership in making pricing decisions.

Throughout the discussion, Tim introduces the frameworks he employs to assess and improve pricing strategies, including the value-based pricing framework and the SpinoMeter. He underscores the crucial importance of understanding customer perception of value, using compelling examples from companies like Southwest Airlines and AutoCAD to illustrate successful value-based pricing.

Tim also explores various pricing structures and their practical applications, discussing how technology is transforming the landscape of pricing. Looking ahead, he envisions a future where pricing is recognized as a strategic function, emphasizing the need for greater professionalization in the field. This conversation offers valuable insights into the principles and challenges of pricing, providing a roadmap for companies to enhance their pricing strategies and drive business success.

Takeaways

- Pricing is a strategic imperative that requires leadership and should be championed at the highest levels of the organization.

- Companies often make mistakes in pricing, such as allowing salespeople to discount excessively or relying on pricing to fix marketing or targeting problems.

- The value-based pricing framework and the SpinoMeter are useful tools for evaluating and improving pricing strategies.

- Successful pricing is based on understanding how customers perceive value, not just the cost of production or margin.

- Value-based pricing can lead to higher margins by aligning prices with the perceived value of the product or service. Understanding the customer's alternative and whether they care about the difference in value is crucial for pricing decisions.

- Value-based pricing can lead to higher margins if the customer perceives a higher value.

- Different pricing structures, such as two-part tariff, tying arrangements, unit pricing, versioning, price segmentation, revenue management, subscription-based pricing, and fully dynamic pricing, can be applied depending on the situation.

- Pricing is becoming a strategic function and organizations are recognizing its impact.

- Technology, including AI and data analysis, is being used to improve pricing decisions.

- The future of pricing lies in professionalization and treating pricing as a discipline.

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Quotes

“Pricing is a quantitative field. If you can't do the math, you kind of don't belong here.”

“(Strategy) is both a statement of where you want to go and a statement of where you will not play.”

“Organizations that treat pricing decisions slowly and methodically, not quick, which is completely opposite to what a sales wants, but slowly and methodically outperform in the long term, have higher return on assets, are more profitable in the long term than those that just treat it as a political football.”

“One of the common refrains I hear from CEOs and CFOs is that price is just a result of market dynamics. We've got supply, you've got demand, they come to equilibrium, there's nothing I can do about that.”

“So that was one where they didn't let salespeople do any discounting. The more common mistake is they let the salespeople do anything they want to.”

Summary

In this episode, we are joined by Per Sjöfors, also known as "The Price Whisperer," who discusses the pivotal role that pricing plays in business profitability. Per explains that pricing has the highest leverage on profitability, exemplified by his "1% challenge," which shows that a mere 1% increase in price can lead to an 11.3% increase in profit. With over 15 years of experience in pricing strategy, Per has worked with companies across various industries, refining their approaches to maximize profitability. Per emphasizes the importance of understanding cultural differences in pricing and the necessity for companies to adapt their strategies when entering new markets. He discusses his book, "The Price Whisperer," which aims to educate people on the science of pricing and provide practical insights that go beyond academic theories. During our conversation, Per highlights common pricing mistakes, such as the reliance on cost-plus pricing and ignoring market segmentation. He explains that true pricing power comes from differentiation and the ability to increase prices without losing sales volume. Per stresses the importance of leveraging consumer perception and effective marketing strategies to create this pricing power. He also discusses the process of finding the right price for a product, which involves conducting thorough pricing research and understanding the various factors that influence pricing decisions. Per advocates for a holistic approach to pricing that encompasses the entire company, suggesting that a dedicated pricing function should guide marketing, product development, and price presentation. Looking towards the future, Per shares insights on dynamic pricing and the significance of understanding buyer behavior and psychology. He calls for businesses to move away from flawed pricing strategies, such as cost-plus or competitor-based pricing, and to focus on delivering value to customers through strategic differentiation.

Takeaways

- Pricing has the highest leverage on profitability, and a 1% increase in price can lead to an 11.3% increase in profit.

- Understanding cultural differences is crucial when it comes to pricing and entering new markets.

- Common pricing mistakes include relying on cost-plus pricing, not considering market segmentation, and viewing the market as homogeneous.

- Pricing power comes from differentiation and the ability to increase prices without losing sales volume.

- Leveraging consumer perception and marketing strategies can significantly impact pricing.

- Finding the right price involves conducting pricing research and considering various factors that influence pricing decisions. Move away from flawed pricing strategies and focus on differentiation and delivering value to customers.

- Price sets expectations and can influence customer satisfaction.

- Establish a dedicated pricing function within the company to guide pricing decisions, marketing, and product development.

- Understand buyer behavior and psychology to make informed pricing decisions.

- Consider the potential impact of dynamic pricing and the importance of price presentation.

- The future of pricing may involve advancements in technology such as AI and data analytics.

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Quotes

“Pricing is not art. It's really science.”

“Pricing has the highest leverage on profitability.”

“For the average company, if you can increase sales volume with 1%, profit goes up 3.5%, because cost also goes up. If you can reduce your cost with 1%, profitability goes up 5.5%. But if you can increase your price or decrease your discounting, which of course is the same thing with 1%, profit goes up with 11.3%.

Murali Sundararajan, a seasoned procurement leader, shares his extensive experience and insights in the field of procurement. Initially transitioning from an engineering background, Murali faced challenges that emphasized the importance of technical knowledge and strategic thinking in procurement. He highlights the transformation of procurement over the past two decades from a transactional function to a specialized, technology-driven aspect of business that significantly impacts cost management, process efficiency, and overall value addition.

Murali discusses the essential elements of procurement including sourcing, supply chain management, and vendor management, underscoring the need for a robust team led by a skilled head of procurement. Key traits for procurement professionals, as Murali notes, include communication skills, passion, technical expertise, and negotiation capabilities. He outlines annual goals for a procurement team which focus on cost reduction, process enhancement, team development, and aligning with business objectives.

Effective sourcing practices, according to Murali, involve networking, thorough research, and leveraging technology to identify and evaluate potential suppliers. He delves into risk management during vendor selection, addressing geopolitical, financial, and logistical considerations. The procurement process itself, as described by Murali, involves an RFI to gather initial data, followed by RFPs and RFQs to finalize supplier selection, emphasizing the importance of detailed contractual requirements and competitive pricing strategies.

Murali also touches on the significance of involving the procurement team early in the purchase process to optimize value and minimize risks. He discusses advanced topics such as the impact of automation, AI, and RPA on the future of procurement, and offers career advice for aspiring leaders in the field, reflecting on his own professional journey and the dynamic nature of procurement.

Takeaways

• Procurement plays a strategic role in reducing costs, improving processes, and bringing value to the company.
• Sourcing involves identifying the right partners, integrating technology, and reducing costs through automation.
• Supply chain management encompasses logistics, overseeing, and delivery of goods and services.
• Vendor management involves developing and empowering suppliers, promoting sustainability, and reducing costs.
• Hiring an experienced head of procurement is crucial to create a strong procurement team and develop a strategic procurement culture.
• Startups should prioritize hiring a procurement expert early on to avoid future challenges and ensure compliance. Procurement has shifted from a transactional approach to a specialized and technology-driven function.
• When hiring for procurement, consider communication skills, passion, technical expertise, and negotiation skills.
• Yearly goals for a procurement team should include cost reduction, process improvement, team member development, and meeting business unit goals.