Archive for March, 2011|Monthly archive page

Private Market Networks Disrupt US Capital Markets

Until recently, companies scouting M&A transactions or looking to raise money sought out familiar intermediaries like Banks, Investment Banks and Alternative Lenders. Today, thanks to the power of the Internet and the emergence of some innovative platforms, CEOs now have another option to address their US financial needs: Private Market Networks (PMNs). 

PMNs like SecondMarket, Angelsoft and AxialMarket are new, web-based financial matchmakers that quickly and seamlessly bring together corporate buyers and sellers as well as financial lenders and borrowers. Though in their infancy, PMNs are beginning to do for Capital Markets what firms like eBay did for classified ads:  leverage the unparalleled reach and power of the Internet to revolutionize an established business.

Like online auctions, PMNs have a compelling value proposition in today’s economy.  Just as eBay allows buyers and sellers to find each other, negotiate the terms, and agree to transact business, so do PMNs enable firms and investors to locate each other and then efficiently narrow down the field of potential business partners through due diligence.

Using the internet to connect buyers and sellers is not a novel idea.  Over the past decade, a number of start-ups attempted to serve as financial intermediaries, albeit with limited success. Thanks to new Web 2.0 technologies, security protocols and integration standards, PMN clients can benefit now from a powerful suite of services, including: opportunity identification and recommendation engines; analytics and evaluation tools; secure virtual diligence rooms; industry comparables and; standardized documentation and fee terms – not to mention deal flow. Significantly, PMNs’ inherent network effects – more sellers attract more buyers and vice versa – have the potential to generate substantial market liquidity in a short time. 

These new business models are beginning to play an important role in a variety of areas.  For example, PMNs are emerging as an important exchange for early stage firms looking for their first couple rounds of venture capital. According to Booz & Co., a consultancy, Angelsoft is attracting over 4,000 global start-ups each month seeking financing. In other cases, PMNs can provide liquidity for employees and early investors in pre-public companies (as was true with Facebook before its Goldman Sachs deal, and remains true for other sexy pre-public companies like Twitter and Zynga). 

Moreover, PMNs could be play a significant role in the arcane and illiquid world of alternative assets.  Not only could PMNs help match investors with hedge funds and private equity funds, but they also could help create secondary markets for each of them.   Moreover, PMNs could provide liquidity for out-of-fashion financial instruments like failed auction rate securities and collateralized mortgage obligations.  Finally, PMNs could provide an active market for traditionally illiquid assets such as art, memorabilia and wine.

Although still small by Wall Street standards, PMNs are growing quickly. According to Booze, SecondMarket closed some $3B of transactions in illiquid securities in 2010, including several hundred million dollars in equities of late-stage venture-backed companies. Moreover, AxialMarket had companies with combined revenues of approximately US$30B listed for sale in 2010 . 

Perhaps the biggest industry impact will be on client fees. Through its model, PMNs can deliver transparency around which fees are paid for what services.  In many cases, this can trigger fee compression. For example, as a rich source of information PMNs can provide for at a low or zero cost basic knowledge of how the sales and financing processes work as well as access to a critical mass of buyers and sellers. As these platforms proliferate, many traditional investment bankers will be forced to reduce fees on commodity services and then compete more aggressively on the higher margin deal structuring and terms.

The history of the Internet tells us that PMNs could flourish and capture significant transactional market share.  Of course, much will depend on regulatory considerations (which are presently unclear), the staying-power of traditional financial intermediaries, and client adoption rates.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Unlock your corporate geek: better forecasting

Recent events in Japan and the Middle East reminds us of the business axiom that better forecasting will lead to enhanced decision making and improved bottom line results.  Practically speaking, however, improving a firm’s forecasts and predictive capabilities is not easy due to many factors, including:

  • Cultural and management behaviors that do not encourage the rigorous analysis needed for effective forecasting; 
  • The lack of analytical competencies that compromises forecasting efforts and;   
  • A propensity for executives to sandbag – under promise, over deliver –  against targets.

Given globalization, ever-tightening supply chains and razor thin margins, companies increasingly have little room for error when it comes to forecasting key variables.  In a just-in-time world, small forecasting errors in consumer demand, earnings estimates or input prices can lead to major swings in profitability and market capitalization.

Fortunately, improving forecasting is within the grasp of most organizations.  However, it does require effort as well as a more complete analytical methodology.  According to strategy+business magazine, companies can enhance their forecasting skill by focusing on a few simple rules:

Pay attention to the range

When making forecasts, most companies look for single estimates of a variable – say demand, revenue or profit – that have the highest probability of success.  However, this is a flawed approach as chances of hitting the target (without financial engineering) is virtually impossible given that the target is usually an average of different estimates.  A more accurate and realistic approach would be look at the range of possibilities that over- and under-shoot the estimate and assign a probability of occurrence to each of them.  A range of scenarios provides more guidance than one target and will usually lead to a more realistic forecast than a single estimate.

Study history

As the maxim goes, history tends to repeat itself over time.  Yet, most organizations record little of their history and how they coped with events. Surprisingly, few organizations go back to earlier forecasts to understand why they deviated from actual results.  Taking a historical perspective would help executives uncover analytical errors, identify management bias, and question faulty assumptions.  Furthermore, taking a historical view would help avoid over confident predictions as well as provide key insights around strategy development and planning.

Tweak the culture

In many firms, developing forecasting capabilities is hampered by cultural factors such as bias, groupthink and laziness as well as a dearth of analytical skills.  To improve forecasting, organizations must foster new cultural practices including: knowledge sharing up and across the firm, critical thinking and continuous learning.   Moreover, companies could demonstrate their commitment by increasing training activities and tweaking hiring practices to emphasize analytical competencies. 

Explore the black box

The emergence of sophisticated computer-based forecasting models has led to many managers placing complete trust in the accuracy of the models, at the expense of understanding the business drivers behind the model or conducting independent analysis.  A false sense of security is created when management is unaware that the underlying cause and effect relationships of the model change. As a result, bad models lead to wrong forecasts.  To confirm model and forecast validity, managers need to understand the business drivers behind the models as well as confirm the predictions through independent analytical exercises.

Engage the crowd

Several studies have demonstrated that the wisdom of crowds is just as good if not better than an expert forecaster in predicting a future state. One way to leverage the acumen of the many is through crowdsourcing strategies.  For companies, these initiatives could collate the insights of a team of forecasters, a sample of customers or a variety of constituency groups including employees or suppliers. 

At the end of the day, using a number of approaches is likely the best way of reducing business uncertainty and coping with the traps around forecasting.  While there is no magic solution, improving the forecasting process is a reward in itself in that it forces companies to identify and plan for different possibilities including potential Black Swan events.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

The critical role of IT in driving sustainability

In previous columns, I have written about how companies such as Nike, Walmart and SAP are using sustainability strategies like Product Life Cycle Analysis, green product development and the reframing of environmental standards to deliver on their sustainability goals. Now, we turn our attention to the important but often overlooked role of Information Technologies (IT) in supporting green business strategies.  In the past, many companies have been reluctant to consider IT for a host of reasons including the presence of significant legacy assets; the mission-critical nature of many IT systems and; the lack of a strong consumer impetus. 

IT systems and their accompanying data centers are a major source of carbon emissions, toxic waste as well as being a major consumer of energy. According to a study by A.T. Kearney, a consultancy, corporate IT departments creates as much as 1 million tons of obsolete electronic equipment each year and produces 600 million tons of carbon dioxide (CO2) emissions worldwide per year. For perspective, these emissions are equivalent to the annual CO2 output from almost 320 million small cars. As well, some data centers are so big that they consume as much energy and water as a small city.

With Internet-based services growing at healthy double-digits per year, IT’s environmental impact will continue to increase rapidly unless management does something to rein it in.  If most organizations are going to meet their aggressive sustainability goals, they will have to take a hard look at their IT operations. 

Where should they start looking?

Powering down

Energy usage is a key area to tackle first. According to the Interactive Data Group, a typical IT department in 1996 spent 17 cents of every dollar to power and cool a new server. A decade later, the rate jumped to 48 cents per dollar.  The firm predicts that number will grow to over 70 cents by 2012.

When considering ways to reduce power consumption, an obvious place to look is the data center.  A number of steps can be taken here including monitoring and improving HVAC efficiency; switching to more efficient blade server and virtualization architectures and; choosing cooler climates to build new data centers.

The front office is another fertile source of energy savings.  Every firm can benefit from quick wins such as installing power measurement and management software and introducing policies that require PC users to shift to low-power or shut-off state when not using their machines.  When Bendigo Bank in Australia mandated employees turn off unused desktop computers, monitors and printers that used to run constantly, they saved more than $300,000 a year in electricity.

Buy greener

Better purchasing governance is an important tool to reduce a firm’s environmental impact.  For example, managers could stipulate that new equipment purchases must bring the highest energy efficiency ratings as well come from companies that feature prominently in sustainability indexes and standards. Moreover, buyers might also look for products manufactured from recyclable materials and that generate minimum amounts of hazardous waste and carbon emissions.  Finally, in order to reduce the purchase of unnecessary assets, policies should be enacted that prevent buyers from over-buying equipment just because someone wants the latest technology.  One way to ensure this happens is by extending the life cycle of IT equipment.

Improve reporting

Some companies are using IT to improve sustainability reporting across the entire value chain.  Dow Chemical’s IT group, for example, acts as a green watchdog, tracking emissions, performance and vendor activity.   Dow is using this data to calculate a net environmental balance across a product’s entire life cycle to help them better understand how materials are consumed in manufacturing. These insights can identify environmental and cost savings throughout their operations as well as their vendor inputs.  Finally, improved tracking and reporting will enable companies to better meet customer sustainability programs like Wal Mart’s Sustainability Index as well as provide key environmental data to consumers.

Greening IT will be crucial to helping many organizations achieve their aggressive sustainability targets. Managers can ill afford to ignore this under-developed area.  

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Beyond the hype: business-centric social networking

Businesses have not ignored the potential transformational effects of social networking technologies like Twitter and Facebook on their own processes, knowledge management and communication systems.  Today, many large IT providers like SAP, Oracle, Microsoft, IBM and Salesforce.com are attempting to capitalize on this interest by developing new enterprise-level social networking products.   These “social platforms” promise breakthrough advances in employee collaboration, knowledge transfer and communications.  As a result, the global market for social platforms is expected to jump from $630 million in 2011 to $1.86 billion by 2014 (source:  IDC).

Potential value

According to the gurus, business-centric social networking will not be dissimilar to what millions of people do everyday with their friends on Facebook, Twitter and LinkedIn.  That is, find new ways of sharing different kinds of information;  break down departmental silos; foster new communities and; enable the emergence of new forms of customer service and team collaboration.  The business impact will be transformational if companies can get the technology, use case and business processes right.  Although social platform adoption is in its infancy, a number of global companies are already blazing a trail:

Dell

Dell is looking to social networking to enhance collaboration and streamline operations.  They have rolled out Chatter, a new Salesforce.com product, across the organization touching all 113,000 of its employees. Chatter allows Dell employees to share profiles, comment on projects and “follow” colleagues as well as important business processes such as invoicing and sales pitches. The Company found that Chatter was effective in improving the connection between its sales team and manufacturing, which helped the firm better meet its customer delivery promises as well as manage overall expectations.

Cisco

Cisco is leveraging social networking to “flatten the organization” in order to improve productivity and accelerate projects. In this model, Cisco is using their proprietary social networks to rapidly form and deploy product & project management teams. Based on internal successes, Cisco has turned this unique social networking tool into a new product called Quad.  This enterprise-level social network solution integrates with business and Internet content management systems and includes Facebook-style status updates and instant messaging.

Current challenges

Widespread corporate adoption of social networking faces a number of significant behavioral and management challenges.  For example, the uneven market experience of existing collaboration and knowledge management systems suggest that achieving ubiquitous, responsible and consistent employee usage will be a challenge.  Furthermore, having social networking on all the time can divert employee attention, reducing overall productivity. Finally, as has been demonstrated with Twitter and Facebook, there is a tendency for some people to over communicate and generate excessive information, creating data paralysis and process slowdowns.

Today, creating effective social networking applications for the enterprise space is still a work in progress. Conceptually, there should be a lot of value added to the organization but the benefits will be different for each process, worker and department. Before business-centric social networking really takes off, there needs to be some proof that these technologies and approaches deliver real process and customer value with minimal risk.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.