Business Operations Survey 2013 Volume 1
Plotting a Path to Recovery www.pathfinder.ie
Welcome
Welcome to Ireland’s first survey of business operations. The project involved interviewing CEOs, COOs and Operational Managers from some of the largest companies on the island.
organisations, how they have responded, and their outlook for the future.
It has given us a unique insight into the pressures facing senior management from sectors across finance, retail, agri-business, hospitality and government.
This is the first in what will become an annual survey of Operational Directors and Managers. Should you wish to discuss any of our findings, how a business can respond to problems it faces, or if you would like to take part in next year’s survey, please contact me at the number on the back of this booklet.
Our research was carried out in two phases. The first included in-depth one-on-one interviews with CEOs, COOs and Managers from eighteen organisations. Three of these are included in full. All were used to inform the conclusions and proposals we reached in the document. The second phase reached a broader audience through the distribution of a questionnaire to businesses across Ireland. The questions focused on the wider perception of the economy, the operational challenges facing
We conclude with four recommendations to businesses and government about how we can move forward.
Many of our interviews will appear in full on our website www.pathfinder.ie in the coming months. Be sure to follow us on Twitter for regular updates: @PathfinderMC.
Saiid Ordibehesht Managing Partner, Pathfinder
Participants Liam McLoughlin,
Dylan Fitzgerald,
Jim Corbett,
Bank of Ireland Retail
Fitzgeralds
Bewleys
Gary Conroy,
JJ Kett,
Ian Simington,
Realex Payments
Voicesage
Bimeda
John Donnelly,
Ursula Murphy,
Tony McQuinn,
Largo Foods
Allianz
Citizens Information Board
Denis Healy,
Sean McGrath,
Port of Cork
Allianz
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Colm Eustace, AGRIBUSINESS
Glanbia Agribusiness
Contents Page Welcome. Saiid Ordibehesht, Managing Partner, Pathfinder
Opinion Piece: Operations and Opportunities - A tale of two economies. Saiid Ordibehesht, Managing Partner, Pathfinder
Questionnaire Results – export and innovate, not export or innovate. Full statistical analysis from Ireland’s largest business operations survey
Interview 1: The Global Challenge - Gary Conroy, COO, Realex Payments. Target: Europe’s largest payment gateway company
Interview 2: The Market Challenge - John Donnelly, Operations Director, Largo Foods. How do local brands stay on top of competitive pressure from global giants?
Interview 3: The Challenge of the Future - Denis Healy, Deputy CEO and Manager, Engineering Services, Port of Cork. The import and export dynamics of a deep water port
Meeting the Operational Challenge - Reshaping the Economy. Saiid Ordibehesht, Managing Partner, Pathfinder
Final Thoughts: Ideas for the Future. Saiid Ordibehesht, Managing Partner, Pathfinder
Contact Us.
Lorcan Rossi,
Lorcan Sheehan,
Glanbia Consumer Foods
PerformanSC
Russell Burke,
Bernadette McNally,
Irish Payment Services Organisation
Office of the Ombudsman
Joe Quinn, Jurys Inn Group
Mike Byrne, Ireland
GS1 Ireland
Stuart Campbell, LaRousse Foods Ltd
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Operations and Opportunity – a tale of two economies Saiid Ordibehesht Managing Partner, Pathfinder
With a population of just over 4.5 million people, only large scale ambition by Irish companies will allow them to expand beyond the domestic market. We carried out nineteen interviews, and it became apparent very early that companies with a strong international presence continue to perform well regardless of the recession.
It became apparent very early that companies with a strong international presence continue to perform well regardless of the recession. This doesn’t mean that they are not under pressure, but being exposed to international markets can lead to improvements in performance. One CEO told us that “competitive challenges are much more severe when you are operating internationally." These companies are doing well not only because they have a larger market, but also because innovation and delivery of reliable and superior services are embedded in their DNA.
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The Pathfinder Business Operations Survey found that while 84% of companies said their main focus was on growth, only 18% saw new products as a way to support this objective. The vast majority said that existing customers (23%), new customers (28%) and exports to new markets would be the main focus of efforts for growth. For Ireland to expand its economy Irish businesses need to look further than simply capturing more customers. The focus has to be on finding ways to add value to the global value chain. Innovation in new products and processes will always be key to this endeavour. Global market In the 21st century, enterprises that operate in a global open market economy thrive when products and services are developed by a network of value providers. “We have to import to be able to export. The question that we continuously need to ask ourselves is whether we are adding sufficient value for what we are charging,” said one COO. In an economic recession this question has become more pertinent as well as more important. It cannot be a concern solely focussed on cost, but instead on the overall value proposition.
All the organisations we spoke to are focused on reducing running costs. Each mentioned efficiency, automation, self-service, lean methodology, centralisation, shared services as well as onshore and offshore outsourcing. However, there remains a level of discomfort in relation to outsourcing to low cost based countries. “We need to compete globally. We have no choice but to get the best value for our investments. Running these processes here will cost three times more for little to no added value. But we can’t help being concerned about the level of unemployment in Ireland,” said one CEO. This view was widely shared among all companies surveyed. 50% of those who had outsourced said that it had resulted in no change in costs and 63% said there was no change in the quality of service provided. Only 38% reported a reduced cost base, with 31% reporting improved quality in service delivered. Adding value Ireland has adopted the free market economy ethos and has chosen to operate in the global market. In such an environment the Irish economy will be dependent on the value Irish businesses add to the global value chain. A welleducated, English speaking workforce which was a valuable asset in the 90s is now facing competition from Indian companies at a quarter of the cost. And let’s not forget that the student population in India is over three times the total population of Ireland, making them better positioned to service large
corporate needs. In fact, for Irish businesses to compete globally they need to leverage from the low cost of offshore commodity service providers. Domestic market The domestic market has been declining since 2007/08. Perhaps one of the best indicators is the size of the insurance market. The revenue from personal insurance has been falling at a rate of 4-6% a year and the commercial market has probably halved due to the serious downsizing of the construction industry.
The commercial market has probably halved due to the serious downsizing of the construction industry. Even though product consumption has also declined the level of reduction has not been that severe, with some organisations experiencing an annual reduction of 2-3%. The simple reason, said one COO, is that “people are either leaving the country or don’t have as much money to spend." This has meant that organisations that were solely focused on the local market have been forced to reduce their headcount by up to 30%.
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Opinion Piece
In retail, the biggest challenge has been the shift from independent grocers to multiples. This is not a new phenomenon. In 2004 the Government assigned eleven members of Dåil Éireann to investigate the impact of the changing retail dynamic on local Irish businesses. A report was produced in 2005, however the implications of the shift in retail patterns were not felt until 2008 when the recession forced consumers to become more price conscious.
An increase in the demand for premium products together with a positive Irish reputation in food and design has created an opportunity for artisan producers. The bigger buying power of the multiples along with high costs of running a business in Ireland, i.e. rent, rates, insurance, utilities, salaries, etc; has reduced the profitability and viability of many retail businesses and local producers. There is an exception; after a dip in 2008 the sales of premium products started to increase and the upward trend continues to be positive. By premium products we don’t mean
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premium brands. In fact, when it comes to commodity products, Irish consumers are moving to non-branded (private label) goods, further adversely impacting the profitability of some food manufacturers. An increase in the demand for premium products together with a positive Irish reputation in food and design has created an opportunity for artisan producers. While product innovation in this area, along with great design, is often enough to create style-of-life local community businesses, they are not and will not be sufficient to boost the national economy. This is where the knowledge and financial acumen of business leaders is needed to bring latent Irish talents centre stage. Online luddites? The lower cost of selling through an online portal means lower prices for consumers, but Irish businesses still continue to give little attention to selling their products on the web. Since 2006 the number of transactions online, which should have grown, has been relatively stagnant in Ireland compared to the UK. Local retail shops provide great local service and local employment but their viability remains dependent on the overall economy.
Operations and Opportunity – a tale of two economies
For the Irish retail sector to grow, business owners need to think internationally and focus on building global on-line brands. There will be no return to the High Streets of the past. Future success lies in product differentiation and effective channels to market. Public Sector The change in the economy has been very visible in increased volume of work for MABS (Money, Advice & Budgeting Service), CIS (Citizen’s Information Service) and the Ombudsman. MABS’ workload volume has increased by between twenty and thirty percent. While the number of queries to CIS has dropped, the cases have become more complex. The Ombudsman has been busy dealing with an increase in complaints linked to social welfare and local authorities. 2011 saw the peak of activities but it has reduced slowly since the second half of 2012. The public sector is actively reducing costs through increased use of the web to provide self-service facilities, consolidation of offices and centralisation of shared services such as Finance & HR. Budgets have been reduced and various departments have been told to reduce their headcount. Under the new Employment Control Framework all excess resources will be placed on a panel for redeployment elsewhere within the public sector. It appears there will be no overall decline in public sector headcount, so savings need to come from elsewhere.
Agri & food The deregulation of dairy farming in 2015 will rapidly change the Irish agri-food industry. The size of the farms will grow, encouraging a mass manufacturing style of farming. This together with a shortage of finance will put pressure on smaller farmers. As a result, some experts predict the number of farmers will be reduced by around 30% in the 5-6 years following deregulation. Larger players are already showing signs of innovation in how they do business in their markets. Smaller players could find competitive pressure too much to bear – deregulation in Northern Ireland saw a quick decline in the number of dairy farmers. Conclusion Over the next pages we have included interviews with some of the most senior Operational Managers in Ireland. These cover a range of issues, and, along with the other direct interviews and questionnaires answered, form the basis of analysis in this document.
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Export and innovate, not export or innovate
Questionnaire Results
Our questionnaire asked CEOs, COOs and Operations Managers in businesses across the country a series of questions on the current state of the economy and their expectations, as well as how they are responding to operational challenges. Their responses are outlined below.
Recovery and revenue growth: Over half (54%) of businesses found the Irish economy’s performance better in 2012 than 2011, with the same percentage finding 2013 better performing than 2012.
How did you find the Irish economy in 2012 in comparison to 2011?
Worse No Change
Better
How do you see the Irish economy in 2013 in comparison to 2012?
Worse
19%
27%
All businesses surveyed expect things to be better in five years time. When pressed, most agreed this was based on hope with some further comments on the government having put things under control.
How do you see the Irish economy in 2017 in comparison to 2012?
Better
Better
19%
Q1
54%
27%
Q2
54%
No Change
Over half (54%) of businesses found the Irish economy’s performance better in 2012 than 2011
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100%
Q3
Company expectations: 79% of companies said they were performing better this year (2013) than last year and 84% said that revenue growth was more important than cost reduction, not withstanding the fact that cost reduction was ongoing.
The main sources of growth are new customers (28%), existing customers (23%), exports and new geography (18%) and new products (18%). This seems to confirm that the growing part of the Irish economy is focussed on exports, and worryingly not as much as it should be on innovation.
The main sources of cost reduction are improved internal efficiencies (58%), reduction in headcount (12%) and move to outsourcing (12%). Internal efficiencies include energy management, training improvements, better change management and improved working practices.
Are you worried about the following external influences? Which ones? Dependency 5% 5% 20%
UK Economy
What is your view of your company performance in 2012 in comparison to 2013?
Q4
At the moment, which is more important for your company - revenue growth or cost reduction?
Worse
Others
Irish Economy
Aside from growth and cost reduction, only 16% of companies said they were focussed on improving quality of product or service.
US Economy 18%
No Change
Cost Reduction
3%
16%
18%
Q5
26%
Q6 79%
26%
84%
Euro Zone
Revenue Growth
Better
What are the sources of cost reduction for your organisation? External Efficiency
Internal Efficiency
Q7
New Customers
Move to Outsource
28%
12% 12%
Export & New Geo
What are your primary targets for 2013? Focus on Improvement
Growth
18%
18% 58%
What are the sources of revenue growth for your organisation?
Reduce Head Count
Existing Customers
Q8 23%
18% 9% 4%
Pricing Strategy Mergers & Alliances
Building on Loyalty
16%
New Products 51%
Q9
7% 7% 2%
17%
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Pricing Adapting to Regulation Cost Reduction
Export and innovate, not export or innovate
Pricing: Over half of companies stated that they expect the prices they charge to increase (52%), yet only 28% expect higher prices from their suppliers. 32% of firms actually expect to LOWER their prices next year.
Prices of your products over the next 12 months will be...
Prices from your suppliers over the next 12 months will be...
No Change
No Change
Reduce Higher
16% 52%
40%
Q11
48%
32% Lower
32%
Over half of companies stated that they expect the prices they charge to increase (52%) yet only 28% expect higher prices from their suppliers.
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4%
No Change
28%
Higher
Q10
The level of outsourcing over the next 12 months will be...
Lower
Q12
Increase 48%
63% report no improvements in quality of service after outsourcing.
Questionnaire Results
Outsourcing: Decision & location: The percentage of companies expecting an increase in the level of outsourcing is the same as the number of companies expecting no change over the next 12 months (48%). The good news for Ireland is that 54% of companies expect to outsource to other firms in the domestic market - 17% to Europe and 13% to India. Only 3% of firms surveyed plan to outsource to China.
The country of the outsourcers...
Europe
Ireland
What impact has centralisation of services such as HR and Finance (Business Partner Model) had on overall cost? Increase
No Change
Q13 13%
13% 3%
Reduce
No Change 6%
12%
17% 54%
What impact has centralisation of services such as HR and Finance (Business Partner Model) had on the quality of service?
India
50%
Q14
China
63%
38%
Q15
Increase
31%
Reduce
Others
Impact: Only 38% reported improvements in cost from outsourcing, with 31% reporting improvements in quality of service. 50% reported no improvement in cost, with 63% reporting no improvements in quality of service. 12% actually reported an increase in cost and 6% a reduction in quality.
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Interview
: The
Global Challenge
Gary Conroy Company — Realex Payments Interview —
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With Ireland’s trade surpluses running at record billions, and the domestic economy in the doldrums, the phrase ‘export-led recovery’ lilts from the radio and meanders through newspaper articles and online discussion. Companies with a base in the domestic market found themselves in a 'do or die' situation with the slump at home. If growth is to happen, it will happen abroad.
“Realex Payments charges a flat fee per transaction. In the Irish market for smaller companies, we charge €29 a month and for that you get 350 transactions,” says Gary.
One company blazing a trail in exported services is Realex Payments, one of the UK and Ireland’s fastest growing online payments gateways. The company processes £18bn worth of payments annually on behalf of 12,000 clients. Founded in Ireland in 2000, the company has offices in Dublin, London and Paris with plans to become Europe’s largest payment company.
While the majority of staff are based in the Dublin headquarters, the business is focused on the wider European market. “Most of our business is actually in the UK and we classify ourselves as an exporting organisation.
Gary Conroy is Chief Operating Officer of the company and he outlined Realex’s ambitions and why growth outside of Ireland is key. A payment gateway is something, in the simplest terms, which helps merchants sell online in what’s known as the ‘card not present’ domain. So, if you pay your ESB, Bord Gáis or other bill online, the chances are it's being processed by Realex Payments or a similar company. How does the business model work?
“We work with SMEs, larger corporates and global organisations. Everyone from family enterprises through to large corporates including Aer Lingus and Virgin Atlantic,“ he adds.
"The payments game is a volume game, and it would be very hard to exist just in the domestic market,” he adds. Growth & operational challenges Meeting a company whose main challenge in the last five years is growth is a rare yet welcome event in Ireland at the moment. “Realex Payments has grown year-on-year since foundation and much of that took place in recent years. The landscape has changed, we’ve grown out of the domestic market because there’s a different scale of opportunity when you go outside of Ireland."
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As well as growth of the existing operation, Realex Payments also now provides white label and managed services on behalf of institutions who provide merchant services themselves. Why did the company decide to expand? “We could see that from 2007 onwards, online transactions from businesses in Ireland, which should have been growing, became stagnant, especially when compared to the UK. If ever you needed an impetus to export, it was seeing that the Irish market was flattening,” says Gary. Realex Payments now provides dedicated managed services to large financial institutions based in the UK and elsewhere. “For example, for Global Payments (formerly HSBC’s merchant services) we now have a team of people who answer the phone as Global Payments. Global Payments simply take our product offering and brand it as their own. Payments relies on volume to scale the business and we have to look at different opportunities to grow,” he says. Challenges linked to growth What were the main challenges associated with this growth? “The expansion to include managed services has brought us challenges, particularly in scaling. In 2005 I was employee No 14, with under 500 merchants. This time last year, we had
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around 100 people and 6,000 merchants. Now we have 160 people and 12,000 merchants. We’ve doubled the number of merchants, all due to exported services,” says Gary. The sheer scale of the operation management required the setting up of a strong internal team with external support. “A specific challenge in the growth of our clients was migrating a book of merchants – we migrated 5,000 of their clients from their old system onto the Realex Payments platform. We set up a dedicated team of 20 people and meeting the deadline required a large amount of focus,” he outlines. Migrating from system-to-system also took place alongside a major uplifting in the wider Realex Payments infrastructure in a process which involved a seven figure sum investment. “At the same time as we were doing that, we uplifted our infrastructure. We spent seven figures and brought all our clients over to an entirely new platform from an old legacy system. This gives us a good platform for the future on which to grow," he adds. Building talent and capability within the team is part of the Realex Payments culture, but the decision to focus internally was also driven by cost. Realex Payments has no debt or external equity funders. “We’re a company that has organically grown with a strong focus on the bottom line.
Says
The new economy is a global economy and only by adding to the value-chain internationally can enterprise and employment be secured at home. A successful business locally may be able to take steps to export and replicate their business in other markets. Such a path is never easy, but Realex Payments’ integrated service offering, priority on system development, market targeting and ability to change with the market means their track record is one which should be replicated.
"We don’t have a bottomless bucket of money to go and spend. We’ve grown year-on-year ourselves, grown our profit and bank balance to focus what we need to do without going externally to get equity or debt,” he says.
customers will be able to see all transactions, all payment methods and the funds in their accounts. The challenge this will bring will be moving into a regulated market. We’re looking to bring that to market this year. “
“Now we have the capability, the core product. A large part of the capability is around the expertise. We’ve focussed on developing the white label initiative, such as what we provide for Global Payments, so now we can help them sell and support that product."
While growth in the company continues apace, its focus is outside Ireland. Gary says Realex Payments’ expertise can help the wider domestic economy get back on the road to recovery.
Outlook – organic growth and new services With half a decade of growth, during one of the worst recessions in history, the future must look bright for the company. Realex Payments has ambitious plans for growth, which includes a new division – Realex Financial Services – but most of this will focus outside Ireland. “We are already one of the fastest growing gateways in Europe – and we want to be number 1. We are looking to provide a holistic solution to the market, by combining a payment gateway, through Realex Payments, along with a collections capability, through Realex Fire. Realex Fire is a product provided by our regulated subsidiary, Realex Financial Services, which is a regulated payments institution. As such it can collect funds – one of the key pieces of payments infrastructure.
“Our focus is not necessarily in Ireland but we have a compelling proposition which will help Irish merchants sell internationally. Particularly online businesses should have ambition to scale across the globe, and we can help them do that. There’s no reason why they can’t compete on that basis. There is already an extremely strong exporting economy there. “Our job is to support Irish merchants with global ambitions who can grow quickly. We hope that we are a success story. There are many good examples of Irish indigenous companies that have those ambitions,” concludes Gary.
“Traditionally this was something satisfied fairly poorly by the marketplace. From now on
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Interview
: The
Market Challenge
John Donnelly Company — Largo Foods Interview —
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After petroleum, electronic goods and chemicals, it is the food industry that holds the fourth largest position among manufacturing industries. The single most important characteristic of the industry in recent years has been consolidation, a trend which is set to continue.
in Gweedore, Co. Donegal; and an additional plant in Yorkshire. John Donnelly oversees manufacturing, new product development, quality assurance and process development across all three sites.
Pepsico is now the second largest food manufacturer in the world with over 60% of the world market for snacks. Since its acquisition of Walkers crisp in 1989, the merger with Smiths crisp in 1993 and the introduction of Doritos in 1994, Walkers has become the UK’s dominant brand leaving the old brands such as Golden Wonder well behind.
The most famous product produced by the company is Tayto but other brands including Hunky Dorys, King and a range of snack foods and popcorn are also made on site in Co. Meath and Co. Donegal.
John Donnelly is the Operations Director at Largo Foods which manufactures Tayto, Hunky Dorys, King and Perri crisps. Together these brands account for over 50% of Ireland’s crisp market. Largo Foods was founded by Raymond Coyle in Co. Meath. He was previously a potato supplier to the five crisps manufacturers that operated across the island at that time. Raymond saw a bigger opportunity as a manufacturer than as a potato supplier leading to the establishment of Largo Foods in 1983. Through expansion and various acquisitions, Raymond’s company purchased Tayto in 2006, making his group the largest crisp manufacturer on the island. Largo Foods has three sites: the largest in Ashbourne, Co. Meath; an Irish-speaking factory
Tayto – an iconic brand in Ireland
Lots of products means lots of processes, John explains: “Potato Crisp production includes handling the raw potato and washing, cleaning, peeling, slicing and then frying. "Extrusion from cereals such as corn and rice gives you onion rings, chip sticks and other products. “Pellet frying is another process where a pellet is fried in sunflower oil, similar to making prawn crackers in a Chinese restaurant. Velvet Crunch, one of our recent success stories, is made through a process where we take granulated pellets, fuse them and expand them together to give the customer a finished product that has very good taste and nutritional properties.
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“Process development and engineering is mostly carried out internally. German company Intersnack, who own a share of Largo, is also a valuable source of knowledge and assistance,” he adds. Single v multipack & other changes in the market Even though Tayto is one of Ireland’s best known brands, the company still faced significant challenges during the recession. One of the first was a move away from independent grocers to multiples, driven in many cases by the closure of smaller stores. “That manifested itself in how we categorise our packaging: impulse and multipack. Typically, impulse would be sold in the smaller newsagents, garages and independent outlets, and our multipacks would be sold in the bigger stores. You have more groupings of independents now, symbol brands like MACE, SPAR, and BWG and less truly independent retailers. “For us that means a shift in packaging from single bags in a box to packing multipacks in a box, which adds an extra processing step. This is a more expensive process and has tighter margins. “Against that another change is towards premium products at the impulse level which does help a little. “We have increased our sales of kettle cooked crisps, which are higher cost, but it’s a more premium process. Kettle cooked crisps are
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batchcooked. It creates a product with a different taste, it’s crunchier and harder. It is considered a premium crisp and it’s certainly more costly to produce". Dealing with market decline A declining market meant Tayto quickly saw the importance of a strong product. The change in economy in Ireland since 2007 had a significant impact on operations. John cites two key reasons for the decline. The first is emigration, where large numbers from their main market, mid-teens to midtwenties, are emigrating due to the financial difficulties. The second is that people’s buying power has decreased and they are looking for better value. This has increased the need for promotions and better offers. John also sees the export market as vital to success in difficult times. “The Irish snack market volume has decreased by about 2-3% per annum, which may seem quite low but it is still very significant. However on the other side of that, the export side of our business has increased in France and other countries, but mainly to Britain. One of the new targets the company looked at was increasing sharing bags, as John explains: “prior to this we would have had a low market share in bigger sharing bags. Kettle crisps are a perfect offering as a sharing bag and we developed products along that line. That was our innovation and product development.”
Says
What is the secret of success in business? Put simply, it's nothing more than innovation, efficiency, market presence and above all dedication and commitment to continuously doing that. Largo Foods is an excellent example of taking global best practice and adding a strong taste of Irishness to produce a market-leading product. While other business services increasingly become owned by companies outside Ireland or even the EU, rest assured our crisps and snacks remain firmly rooted at home for the forseeable future.
Making changes
Survival of the fittest
Dealing with the economic difficulties in this way didn’t come without making major changes to the company, so what were the changes made? “We completed a major rationalisation programme between our two sites in Ireland. We obviously did this in consultation with our workforce over a long period of time. Regrettably people were made redundant, but the business is stronger now. Gweedore has more focussed, less commodity based products now and this site is maximising its volume.
John highlights the big period of growth for Tayto between 2003 and 2006, when the business trebled in the space of three years. “At this time a large own brand supplier in the UK closed down, and their business with Morrisons and Tesco for snacks was awarded to our Donegal snack plant. The plant volume trebled in that time. Then Tayto outsourced its crisp production to Largo in 2005, and in 2006 we acquired Tatyo. When the markets changed in 2008 we were fitter to survive.”
“We do outsource some products, for example we have never produced nuts. And the simple reason is scale - there wouldn’t be the scale in Ireland to have a proper cost effective nut operation. And the second issue is that nuts are an allergen. If we put them into one of our existing factories we would then have a potential problem with allergen contamination. It’s really an economy of scale and safety decision. There’s no cost implication behind the decision to outsource.
John is clear about the strategy for going forward for Tayto, “For the future it’s really more of the same. Keep reducing costs, keep trying to grow export volumes, keep trying to be innovative.”
“Robotics has led to a major shift in technology over the last few years, there is much more available now than ever. It has become much more of a feature of the business. There’s always a challenge linking technology and the process - a bag of crisps is an irregular shape and automation is more difficult dealing with irregular shapes than regular shapes."
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Interview
: The
Challenge of the Future
Denis Healy Company — Port of Cork Interview —
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Statio Bene Fide Carinis. For those who aren’t Latin scholars, and aren’t from Cork, the chances are you’ll be unfamiliar with the term. The phrase from Virgil’s Aeneas, ‘A Safe Harbour for Ships’, is the city and Port’s motto and is testament to the area’s maritime tradition. Much of that tradition centres around the Port of Cork. With a unique insight into both operational pressures facing a deepwater port, as well as the wider dynamics of imports and exports in the Munster region, Pathfinder spoke to Denis Healy, the Port’s Deputy CEO and Manager, Engineering Services. How important are ports to a national economy? Based on the latest government policy document, you could say very important. In Cork’s case, it forms a central part of the discussion in the National Ports Policy 2013 document and is one of only three ports in Ireland identified by the European Commission’s TEN-T agency as being a priority for funding and investment. Add to that the fact that Ireland’s only oil refinery is located in Cork, and that Munster forms one of the island’s largest export regions, the critical role of the Port in the national economy becomes clear. Founded under the auspices of the Cork Harbour Commissioners in 1814, the Port of Cork is the third biggest port on the island after Dublin and Belfast. The Port’s sole shareholder is the Department of Transport, Tourism and Sport under a statutory relationship set out in the 1996 Harbours Act. The Port of Cork has a role both as Port Authority and Port Operator.
Before discussing the operational challenges, what are the actual revenue streams for a port like Cork? “Revenue comes from a range of different sources. Ship’s tonnage, goods rates, cargo handling, crane usage, pilot services and towage services make up the primary revenue drivers. As well as that we have ferries and cruise liners and their associated income,” says Denis. The Port of Cork owns considerable tracts of land from which it derives property rental income. It receives no government funding, and, as Denis explains, operates under tight fiscal demands: “We’re wholly owned by the state and are expected to both remunerate all capital investment and pay a dividend of 30% of after-tax revenue to our shareholder.” Multiple revenue streams present multiple operational challenges. Cork’s location also makes it unique in terms of balance of trade: “In Cork there is less consumer demand and a much higher level of exports thanks to the region’s strong industrial and agricultural base. Dublin is much more of a consumer market and there’s an imbalance there with imports and exports – at times they would have seen one export box for every seven coming in,” says Denis.
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How has the overall revenue line performed over the last five years? “In terms of imports, which ultimately are dictated by consumer demand, it fell through the floor. From building materials to toys to timber, there was just a complete shut off initially followed by a kind of recovery. Growth recovery has been slow, with a 10% recovery initially and between 1% and 3% since then, but it’s going in the right direction and profitability is increasing as well,” says Denis. “Overall trade in volume terms fell by 30% on average over 18 months, with some trade showing even larger decline, and a corresponding decline in revenue. That had a huge impact on our business and we worked closely both externally and internally to mitigate against the changing circumstances,” he adds. So how does a large organisation with a high level of fixed costs and fixed assets manage such a decline in volume? The response focussed both on external and internal change. External change – walking with clients The Port undertook an exercise in customer management which saw the organisation strengthen their partnership approach with customers. Denis says the Port essentially began to “walk with” those clients who were a bit squeezed or finding things difficult. “The idea was we would walk together through the recession and hopefully both come out stronger at the end,” he says.
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This meant extending credit, giving discounts, and providing other commercial aids which allowed their business to continue. As well as that, Denis cites the fact that this allowed both Port and client to develop loyalty to each other. Internal change – pricing and planning The two operational challenges facing the Port, says Denis, are prices (pricing strategy and cost management) and infrastructure planning. All of this in a business where fixed costs make up a high percentage of overall costs. To manage these challenges the Port undertook outsourcing of various operations including, among others, security, energy management and IT. With an energy budget of over €1m per annum, significant savings have been accrued by employing outside specialists. All the outsourcers are based in Ireland. As well as outsourcing, the recession also saw a reduction in labour costs. This involved more efficient working arrangements, pay cuts, voluntary redundancies and management restructuring. That process included engagement with trade unions, as some administrative workers had a historic relationship with the public sector, while others (crane operators for example) are related to private sector industry norms. The change also included upgrading of IT and a restructuring of maintenance practices and systems. Beyond that there are no further plans to outsource or to change the structure.
Changing dynamics in trade The changing focus in the international shipping markets towards larger and deeper drafted vessels means that ports have to respond says Denis. While Cork has the natural resource to cater for this market, as one of Ireland’s deepest ports, the big challenge is to deliver infrastructural change. “The big challenge for us is to provide certainty in terms of our future and in terms of securing planning consent, something we weren’t able to do in 2008. We need new facilities to address larger and bigger ships and that will ensure we retain competitiveness well into the future,” he says. “Without change, a shift in capacity could make export costs more expensive. As volumes of imports drop, transport companies are trying to increase export costs,” Denis stressed. The final question around expansion surrounds funding. Ongoing difficulties in the finance sector are outlined elsewhere - should the Port of Cork get planning permission for expansion, is the funding available to carry out improvements? “Funding will be a problem, but our land bank, even in this environment, still offers us an opportunity to secure finance, and, as well as that, there’s an opportunity for TEN-T funding. The fact that we’re a core port in Europe means we can access funding directly from Europe,” he adds.
Says Managing a 30% decline in volume and a corresponding decline in revenue is a difficult task for any business. Add in the statutory basis of the organisation, a complex operation and staff team, and one of the most challenging public finance environments in history, and the challenges are significant. The Port, through a combination of internal efficiency and the establishment of a partnership style of engagement with clients, has managed to weather the storm. A macro focus on infrastructure is vital for wider economic growth. If ever there was case of 'build it and they will come' then this is it. While we have the exports, the big question is will we ever see a return to a satisfactory level of imports?
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Reshaping the economy Meeting the Operational Challenge
How did Ireland’s largest firms, faced with unprecedented local challenges, meet the demands of improved global business processes?
Reducing costs: “It was more than just a target; it was a matter of business survival.�
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As Ireland’s economy went through what was probably the most traumatic time in its history, the world economy kept growing with improvements in operations and productivity across manufacturing and services. How did Ireland’s largest firms, faced with unprecedented local challenges, meet the demands of improved global business processes?
Having interviewed nineteen CEOs, COOs and Operations Managers, Saiid Ordibehest offers his views on the specific operational challenges currently facing business in Ireland. For any COO minimising and reducing the cost of operations has always been a primary objective. In Ireland in recent years however, to quote one operations chief: “It was more than just a target; it was a matter of business survival.” If any sentence brings into focus the challenges faced by businesses in the last five years, it is this one. The collapse of the local domestic market, the slump in available credit and the lack of any significant external investment meant businesses had to fight costs to survive.
So in this game-changing scenario, how did businesses maintain competitiveness to support global expansion when things became chronically bad at home? Our interviews and survey have shown that consolidation of products and services, moving customers to self-service platforms, squeezing more efficiency from existing processes and outsourcing are the four main ways companies have adapted to the new business environment. Consolidation “All roads start and end with customers, so does product consolidation,” said one senior manager in a major Irish company. By reducing the range of products and services, firms always take the risk of losing customers. Focusing on product profitability however, is never enough. More successful companies began to focus on profitability at the customer level. They examined which customers were profitable and explored which products where vital for these. After careful consideration some companies decided to discontinue a number of products and services and in fact lost certain profitable customers.
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Meeting the Operational Challenge
They simply wanted “to make sure their offers to the market fit with what they want to achieve," to quote another CEO. It also meant that the reputation of the supplier was augmented by the association with high value and high profit customers. Customer self-service The introduction of self-service facilities in a range of industries, especially finance, has reduced the cost of operations and has given customers more flexibility. The challenge has been to create a new and positive mindset with customers. Companies that have been successful have led with a design-simple but customer-focused implementation strategy. They have invested time for staff to proactively support their customers until self-service has become a new habit for them. One of the key considerations of implementing self-service functions has been building robust processes which kick in if the systems are down. This has been especially important to providers of online services.
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Lean manufacturing During periods of economic crisis, like that which Ireland faced, anyone who can answer the conundrum of how to deliver more for less is essentially providing a magical solution. Thanks to the pioneering thinking of Edward Deming and the foresight of Toyota for implementing the concept, Lean manufacturing has provided a solution to this dilemma. Practically every company we have spoken to is implementing Lean and getting great results, but the most interesting observation was from one senior figure who said: “We have implemented Lean successfully and managed to reduce our costs. The problem we are now facing is that people don’t follow them.” From what we have seen most organisations have used familiar elements of Lean production to eliminate readily visible waste in their processes but have struggled to make a shift to the next level. Lean is not about finding ways of getting slim i.e. laying off people.
Reshaping the Economy
It is about different ways of tackling problems, coordinating across the enterprise and introducing new standards. If you are redesigning your processes using “Lean”, more than likely you are just using business process design techniques to change your processes. The problem is that if you don’t challenge the usual hierarchies then you are just touching the surface. Introducing Lean is an opportunity for root and branch reform. Outsourcing One COO succinctly summed up the first principal of outsourcing: “As much as you can tie someone into SLAs, for something that is so core, the preference is to keep it close.” The challenge for most organisations is to decide what is core to business, what has strategic importance, what risks they are willing to take and why they trust the outsourcer to manage parts of their business. Those organisations that have been dissatisfied with outsourcing were, in the main, not ready for it. They
relied on the outsourcer to guide them and overestimated their own ability to become part of a global supply chain. Organisations with successful outsourcing track records only outsourced “a well managed black box which had clear and relatively reliable inputs and outputs within the organisations,” to quote one manager satisfied with how the process had gone. From what we can see in most organisations the urgent activities have resulted in semi-stability and the pressures have been reduced, but it doesn’t mean the organisations are “fighting fit”. In the next two years there will be more changes in the form of mergers and acquisitions which will put more demands on people and will influence the shape of our economy.
Saiid Ordibehesht Managing Partner, Pathfinder
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Ideas for the Future
The export market is growing and the domestic economy has now settled. But to grow a sustainable economy requires a change in perspective. The first thing to accept is that there are no quick solutions; sticking plaster solutions just prolong dealing with real issues. To build a country that competes on the global stage is a long-term commitment and requires continuous reinvention of products and services that we offer as a nation. The era of “Irish jobs belong to Irish people� is over. Put simply, the jobs we fulfil in Ireland are only temporary positions. They will be here as long as the value of services we offer exceeds the cost of operations in comparison to other countries. Ireland cannot compete with rapidly developing economies in manufacturing and Business Process Outsourcing services. To succeed in the future and to build a sustainable economy means giving a long-term commitment which goes beyond ourselves. This means developing a new mindset.
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Ireland cannot compete with countries like India for supplying commodity services. The sustainability and growth of the countries that operate in Western economies, such as Ireland, are highly dependent on innovation, commitment and dedication to the quality of their products and services. Our survey results show a continued focus on growth over innovation. In a competitive global market it is through innovation and continuous reinvention of our businesses that growth can be achieved. Even fewer companies were focused on improving quality and actively developing themselves to become the best in the business. We need to challenge ourselves against global best practices and standards and not the local market expectation. In my view this change will only happen when we truly acknowledge that our local market is too small and volatile for building a sustainable business. And until that happens it will be very challenging to grow the national economy.
We cannot put the entire burden of building the country’s economy on the local business owners. Irish talents, financiers, entrepreneurs and innovators have a significant part to play. They need to invest themselves into building the country rather than a short-term focus on maximising individual financial returns and engaging in rent-seeking behaviour.
Saiid Ordibehesht Managing Partner, Pathfinder
To succeed internationally, we need to replace the phrase “I work to live but not live to work” with “I work and live to build the economy and create prosperity.” This is what drives success globally in countries and regions across all continents. We need to do the same here.
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Contact Us
Pathfinder works with a range of businesses and organisations in Ireland and the UK. We establish insight into how you interact with your customers and with each other. We can work with you to design the interventions needed and if required lead the Change and Transformation Programmes. For further information you can contact us below:
IRELAND OFFICE
UK OFFICE
Harmony Court
51A Frederick Street
Harmony Row
Edinburgh,
Dublin 2
Scotland, EH2 1LH
Call +353 1 433 3080
Call: +44 131 208 2380
Email: opendoor@pathfinder.ie
Email: opendoor@pathfinder.ie
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Ireland Office
UK Office
Harmony Court Harmony Row Dublin 2
51A Frederick Street Edinburgh, Scotland, EH2 1LH
Call +353 1 433 3080
Call +44 131 208 2380
Email: opendoor@pathfinder.ie
www.pathfinder.ie