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Catch-22 for Brick & Mortar Retailer’s – e-retail or not ?
Kreston Menon
In India, e-tailers like Amazon, Flipkart and Snapdeal in recent years have not only made the youngsters below 30 their ardent buyer from their online platform but also have of late been able to net the people in the age group of 30 to 50 as their customers.In the case of below 30 customers, the e-tailers lure them through latest imported offerings under fashion accessories and electronics which the brick & mortar players do not provide with so many optionsFor above 30 customers the value proposition that the e-tailers bring in is not only limited to convenience of buying but also the price discounts compared to physical stores. More and more niche e-tailers entering the consumer segment coupled with increasing penetration of cheaper internet services penetrating to new areas is further giving fillip to the e-retail business gaining more traction from the masses leading to share of online purchase increasing at the cost of physical stores.
Why the Brick & Mortar Players adopted an “Ostrich like attitude” to the e-tailers when the war began between them and e-tailers? Did they really believe that the buying habits of people are hard to change? Did they believe that people used to buying from physical stores would not buckle to the emerging trend purchasing online?Did they believe that the e-tailers do not have a robust business model that can last long? Did they believe more highly about their physical stores model compared to shopping online model? Was it the legacy management style of the Brick& Mortar Players refusing to foresee the technological revolution happening propelled by internet?
In my opinion there is a combination of above factors besides others that led to growth of e-tailers and physical retailers slowly losing market share to e-tailers.
The most notable change that has led to growth in market share of e-tailers is the fast changing technology in the hardware, software and data connectivity options that become widely available and the price of the mobile and data services falling drastically in the last five years. A new breed tech-savvy young entrepreneur began to create software and online marketplace with easy interface between small and medium retailers and buyers in the market place making online transactions a child’s play. The secured payment gateways offered by banks and credit card companies with additional security options by sending PIN for each transaction has also increased the customers confidence to shop online.
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The management of big physical retailers in many cases were often myopic, not to notice the software and communication revolution happening and impact on their sector. If only the top bosses at retail companies had realised that the first victim of the technological and communication revolution were the traditional banking and insurance sector and next would be retail, they could have better prepared themselves to face the onslaught of the e-tailers.
The information technology and internet totally changed the way banking is done today compared to the late 90’s and the early 2000. In the late 90’s it was the India-based new private banks such as HDFC and ICICI besides Citi and HSBC which started the ATMs, online banking in a big way when the traditional government banks scoffed at them.
The traditional banks also patted themselves when online frauds happened at the nascent stages of the e-banking. During the initial years a majority of the customers of the banks also initially were reluctant to deal with their banks through online platform, fearing online fraud. As technological advances made online banking safe, more customers began to bank online and today online banking has sizable share in terms of number of transactions and in terms of value it has surpassed traditional banking at counters.
Banks that avoided automation have now aggressively migrated to online platforms and in many cases such as State-owned State Bank of India has even outgrown the private players in terms of automation and online offering of features and service for its customers.
The management of many Brick & Mortar retailers with more than two to three decades of experience initially ignored the e-tailers and looked at e-tailers with contempt as many of the e-tailers had their CXO’s in early 20’s. The physical retailers had full faith in their ability to brainwash their customer base through print and electronic media about perceived failings of the e-tailers and celebrated the failures of the e-tailers as their success. They totally underestimated the capability and capacity of the e-tailers to bounce back after each failure with greater success and more offerings for the online shoppers.
In many cases the Brick & Mortar stores created failure stories about online players offering inferior product through their platform or lack of after sales support, though the physical stores themselves were never good in providing after sales support. Rather the online players like Amazon and Flipkart with their free 30 days return policy where offering the customers something that the physical stores had never offered to customers in many Asian markets including India for decades
Today the online players are gaining more customers at the expense of physical stores. The primary reasons are the cheaper price of buying same/ similar product compared to physical stores, getting same or net day delivery at home, ability to see the product with three-dimensional view, multiple payment options like debit card, credit card and cash on delivery, wide choice of goods to compare and in some cases like mobile phones exclusive launches of new phones only through online platform.In families where both spouse work, due to high commute time to place of work, shopping online has become a convenient option. With more and more e-tailers offering goods online, almost everything which was exclusively available at physical stores can be now bought via mobile handset.
Also Read : Digital Marketing For Better Demand Generation
For most Brick &Mortar retailers, the shift in the retail ecosystem has negatively impacted revenues. Show-rooming has become a reality— the shopper uses the information provided by the staff at the store but eventually makes the purchase online, sometimes even while he/she is in the premises of the store. Many physical retailers are beginning to understand the power of e-platform and pervasive use of mobile technology by people of all age group which is leading to people experimenting with online purchase and many finally converting to online shopping as their primary mode for many categories such as books, shoes, mobile phones, consumer electronics, gifts, fashion accessories and apparel.
Having made huge investment in real estate by leasing or building physical retail stores the Brick & Mortar players are in a real dilemma. They cannot totally junk their business model and put their business and that of their lenders at risk. At the same time ignoring the e-tailers and not adopting a hybrid model whereby they have their own online shopping platform for their customers is a proposition they can no longer ignore. By having both physical stores and online platform they would end up competing against their own online format of stores, besides competing with other e-tailers. A very complex scenario of business model, where their online formats of stores would have to set a pricing for product that is lower than physical stores to match their competitors online. Such an approach would require them to revisit their physical stores business model and growth strategy and would definitely require junking some of their existing business plan and more importantly their earlier mind-set about online retail format.
The Brick & Mortar players also need to play to their strength when adopting a hybrid model of physical and online retail formats. In case certain category of purchases (e.g. home appliances and white goods and groceries) the shoppers like to touch and feel the product before they commit purchase online. In such scenarios the physical retailers can definitely have more loyalty from their customers by offering them touch and feel option besides attractive pricing.
e-retail is here to stay and Brick & Mortar players can no longer pretend to ignore the e-tailers. They need to revisit their business model that is built on physical stores expansion and identify product categories where they need to offer online platform for customers to shop. They may also need to take the hard decisions of closing many of their physical stores or stop certain products from being offered at physical stores. Brick & Mortar retailers will have to bring in below 30 tech savvy entrepreneurs into their management to successfully leverage the fast changing technology in the online retail space.
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VAT DESIGN AND ROLLOUT – Series 2
Kreston Menon
If we look at the international experience in VAT implementation, the VAT is paid on a net basis on the difference between sales and purchases (of inputs) and there should be no break in the VAT chain (through exemptions) to avoid tax cascading. Another notable feature of VAT implementation is the ‘destination principle’ which means that goods and services are taxed for VAT only in the jurisdiction where they are consumed.
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Converging Organization’s Governance,Risk & Compliances
Kreston Menon
The common problem which organizations are facing globally, while implementing robust GRC standards, is of Risk Silos. Risk Silos arises when each of the oversight function (individually) gathers information from business divisions to identify potential risks. This leads to duplication of efforts (Risk Silos) among various oversight functions (including Risk Management especially Operational Risk, Compliance, Corporate Governance and Internal Audit) which increases inefficiency within the organization. It also leads to disinclination of business managers to engage with oversight functions more proactively.
This article intend to discuss and deliberate the strategy for bringing synergy to the work flow and process of organization’s oversight functions (three lines of defense) to maximize the coverage of risk within the organization.
Current State Vs Future State
Organization must look to assess their existing GRC infrastructure and framework so as to identify the key challenges and address the same through implementation of sound convergence framework, thereby achieving the “Future State”
Risk Register – Integrated Assessment Process
In order to effectively manage the key risk areas of the organization, a common repository of risk is desirable. The same can be achieved with the implementation of a Common Risk Register among the various oversight functions of the organization
A Risk Register is a risk management tool which acts as a central repository for all the risk identified under the risk universe of the organization. Risk Register covers the rating of likelihood and impact for each key risk and their subsequent action plans.
Implementing a Risk Register would enable the organization to remove Risk Silos as it acts like a common platform for the communication of the key risk areas to the key stakeholders (including the various oversight functions discussed above) within the organization. Risk Register also facilitates the development of common risk language and methodology for assessment of identified risks among the various oversight functions, thereby reducing the duplication of efforts at assessment level. Finally, a common approach to mitigate the risk would enable the organization to strengthen its preventive/ contingency/ recovery actions.
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Convergence Framework
Organizations can develop a sound convergence framework that shall act as the guiding principle for the oversight functions to avoid duplication of efforts. The guiding principles should ensure that the roles and responsibilities of the oversight functions are not curtailed and that the independence of internal audit always remains. The framework shall also entail all the areas, where the overlap is prevalent, including, but not limited to:
- Identification Process for Risk Issues (RCSA/Audit);
- Control Based Rating vis-à-vis Management Awareness Based Rating methodology – to ensure the assurance approach is consistent;
- Common rating methodology
- Reporting of the issues to Board Committees & Stakeholders;
- Integrated Assurance Approach – Risk Register;
- Follow up on open risk/audit issues;
- Closing of the issues; and
- Review calendar of oversight functions and align visits to divisions.
The Convergence Framework should also entail the frequency of the meetings for these oversight functions to discuss and achieve Convergence of GRC. The same can be recommended based on the size and complexity of the organization.
Also Read : Startup Challenge: Importance of MVP
To conclude, Alignment & Convergence of the Organization’s GRC functions and processes can help reduce duplication of efforts and help provide increased confidence in, and transparency of, information but without compromising the independence required in the audit function, thereby minimizing Risk Silos and facilitating the sharing of risk information across the organization.
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Operational Risk Management in a Low Oil Price Scenario
Kreston Menon
Operational Risk is the potential of loss arising due to failures in systems, people and / or operational processes which can result in an impact on People, Assets / Production, Environment or Reputation. Operation Risk Management (ORM) is the means and processes through which Operational Risks are managed through an asset’s operating lifecycle.
Traditionally many Organizations in the Oil & Gas and allied sectors have developed ORM Frameworks to manage Operational Risk utilizing a Hazard & Consequence Type Model associated with an Organization Specific Risk Assessment Matrix and other tools against a specific Risk Tolerability Criteria pending their risk appetite.
It is clear from an analysis of past major industrial accidents that Operational Risk needs to be managed in a coherent manner given their potential adverse impact,
But, is the industry focusing enough attention during an asset’s operating lifecycle which could be between 20 – 25 years, during which time organizations face the major operational risk exposure. Moreover, can operational risk be minimized or completely avoided.
In reality no organization can eliminate operational risk totally, however, this can be reduced to As Low As Reasonably Practicable (ALARP) by employing additional residual risk measures, protocols and Best Practices to the point at which the incremental benefit of level of risk reduction achieved is out weighted by the cost.
Key Benefits of ORM
The benefits of managing Operational Risk effectively during an asset’s operating lifecycle can be summarized as follows:
- Reduces the potential for Major Accident Incidents and / or other incident categories;
- Increases probability of maintaining and sustaining production at maximum / optimum levels required;
- Enables asset to maintain Safe Operations.
However, the above benefits can only be realized if asset Integrity management and maintenance programs are aligned to asset requirements through their lifecycle. It can also be argued that additional emphasis should also be placed on understanding more precisely the integrity of each asset, given stage in its life cycle, life extension / remnant life assessment , in an environment of ageing infrastructure particularly in the Middle East Region.
Why ORM should not be compromised in a low oil price scenario
The current scenario of a low Oil Price (from a peak of over 100 USD per Barrel in 2014/2015 to a low of just under 28 USD per Barrel in Q1 2016), has initiated a wave of capital rationing, new project cancellations or deferment, cost reduction measures and streamlining of operations and staffing in the Oil & Gas and allied sectors both in the Middle East Region and Worldwide.
This situation could have an impact on increasing operational risks of existing assets if not addressed.
This recent shift in focus of sector’s cost cutting activities, has further exacerbated the potential for major industrial accidents, pending the focus of cost cutting measures. If such cost reduction measures are too deep or not optimized, then this could lead to inefficient operations and increased operational risk along with not meeting the major goal of maximizing production in a safe manner.
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Despite an oil price recovery to approximately 50 USD per Barrel in Q2 2016, there seems little evidence of this cost cutting trend reversing. This must also be viewed in the context of an ageing infrastructure and uncertainty in asset integrity particularly in the Middle East Region.
While the Oil & Gas and allied sectors continue to implement traditional measures of ORM as a basis for reducing operational risk (e.g. carrying out Task / Job Safety Analysis Risk Assessments, updating operation management, Permit To Work and Management of Change (MOC) Procedures as an asset is modified during its life cycle) incidents continue to occur. This seems to suggest that organizations in the sectors are missing something here?
It is further suggested that a new approach to and emphasis on ORM is required and embedded into an organisation’s Enterprise Risk Management (ERM) Strategy, processes, policies, procedures and decision making in order to reduce the likelihood of untoward events and incidents occurring.
How can companies not compromise on ORM in a low oil price scenario
Given what we know and understand, it can be concluded that:
- Operational risk exposures are further exacerbated in a low oil price scenario given current cost reduction measures undertaken in the sectors considered pending investment focus, which should be as a minimum relate to Safety Critical, Maintenance Critical and Asset Integrity aspects;
- Operational risks need to be managed more proactively with a new paradigm thinking approach, if assets are to be sustainable and organization goals of maintaining and maximizing production safely are to be achieved.
Also Read : Converging Organization’s Governance,Risk & Compliances
Such a paradigm shift in thinking and approach to operational risk management of an asset during its operation lifecycle should give due consideration to the following:
- Adopt a modern ERM approach to operational risk management whereupon operational risks are considered and embedded in Strategic planning, ERM processes and Decision making which includes a critical review of current practices, procedures, performance and Gap Analysis;
- Identification of all Operational Risks and their categorization including range of possible outcomes ;
- Being Proactive not Reactive in Risk Measurement with an emphasis on Detection( source Historical / Industry Data / Other ) ; expressed in terms of loss frequency and severity and development of Risk and Residual Risk mitigation strategies rather than traditional current models;
- Develop robust and systematic processes for making business decisions where the level of risk to be assumed net of controls is aligned with the risk appetite and risk tolerability criteria of the organization including stress testing;
- Build lessons Learned into operation risk Decision Making and control strategies and implement Asset Reference Plan, Asset Integrity planning and Best in Class Operational and Maintenance Practices;
- Revise / Align current policies, procedures ( e.g. Management of Change; Job Safety Analysis, Permit to Work etc ) operational management systems and risk / residual risk control measures in line with Best ORM Practices to ensure achievement of operational risk goals;
- Carry out independent risk based audits
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Change Management – The Secret Weapon for a Volatile Business Landscape
Kreston Menon
Artificial Intelligence and end-to-end automation seem to be the buzz word in business and technology circles these days. These are technologies that are bringing about radical changes to the way businesses are run on a day to day basis.The operational efficiency and customer experience thesetechnologies bring in are unparalleled and it is predicted that almost all organizations will significantly adopt AI and end-to end automation in several processes in the next few years.
While these technologies are brilliant in themselves it is far too utopian to think that they will replace humans completely in the organization. These technologies will simply replace repetitive work within a process pushing the employees into roles that require more cognitive thinking much like how the world doesn’t need ledger keepers or typists anymor. Technology used to change only once every 8-10 years until a decade ago, now it does every year and in some organizations much faster. If this change was not enough most sectors are governed by ever-changing regulatory compliance, employee role changes and attrition. Mergers and acquisitions bring about large scale changes which are driven by people, process and technology integration.
This leaves an obvious elephant in the room (or in the city office!) – Managing Change effectively and completely.
Like all good practices, Change Management too is a culturethat is inculcated within the organization. Change is the most difficult aspect of human behaviour to achieve and Employees need to be sensitized about the benefits change will bring about in their own job roles. This cultural shift is entirely driven by the stakeholders at the Board level ensuring that the Executive Management buys into the concepts and more importantly believes in it.
Another critical aspect is choosing the right methods and tools for business change. Employees make changes to technology, employees conduct impact analysis, employees make changes to processes, employees need to adhere to regulatory polices, employees need to use changed technology to deliver superior services to customers. Yet employees are provided with yesteryear’s change management methods and tools.
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While operations and regulatory compliance impact analysis tools are virtually non-existent out of the box, change related competency enhancements are carried out by outdated tools such as a learning management systems or e-learning tools. Change information related to the process itself is embedded inside complex BPM tools that can be decoded only by analysts or technology folks and documentation tools provide the repository of business information documents that runs into hundreds of pages, defeating the very purpose of easy change management.
Most organizations are using one or more of these tools to achieve change management, which in itself has a fundamental flaw. These are not integrated systems that target employee experience during change management. Change Management should be driven by simple visual process information that can be interpreted without ambiguity across the organization. It should integrate regulatory information, IT system information and documentation related only to the specific process that is being accessed. The employee should be able to only see the information pertaining to her everyday work, nothing more nothing less. She should be able to understand all of this in a couple of minutes and not need to spend hours trying to link and put together various pieces of information she is seeking by herself. Finally, the management must have superior tools to investigate the impact of any operational or regulatory change and have an easy way to broadcast, collect acknowledgement and test the knowledge about the change of the employees. All of these must work in one single system to make change truly effective.
Change Management is one of the most complex organizational challenges because it involves large set of people. It is imperative that the following steps are considered to make it potent:
Make employees the focus from the planning stage of any transformation or change management programme
Choose the right technology tools to engage the employees effectively. If their buy-in is subpar then the effectiveness of any initiative is limited.
Ensure that all elements of the organizations that need to be consumed viz. processes, regulations, documents, procedures and policies, technology system information,are completely integrated with one another.
Deliver only role specific information to each employee, this cuts the clutter and helps find the right information at the right time easier.
Each set of information need to be kept “bite-size” and contextual. This ensures that the information is easily digested.
Supervisors must analyze the inter-connectedness of each organization elements with one another. E.g. What processes and IT system functionality change because of a regulatory change, in turn how many locations and employee roles are affected?
Have a realistic approach to understand the employee awareness of the change. E.g. (a) Have a quick 2 min objective type online test about the change, 45 days after the change has been communicated. (b) analyze the number of hits a particular information gets from each employee role.
Build in effective feedback loop from the employees. This helps in fine tuning the method and tools.
Finally, one needs to be pragmatic and not over engineer the methods or the tools. Like most things in life, keeping it simple helps in making change management, manageable.
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Standards of Innovation in Auditing
Kreston Menon
The world of Auditors is becoming dramatically a competitive cutthroat that lead certification authorities of auditing to differentiate themselves by bringing out few added values. But, today most of the auditors in UAE keep their focal point on compliance rather than exploring real opportunities for improvement. Due to the global financial crisis and succeeding questions regarding the value of financial statement audit, it became mandatory to mold a management system, which can develop distinctive quality innovations for audits. This will demand a turnaround in thinking for auditors, however, it stays as an active opportunity to build added value for clients.
Auditing for innovations!
Innovative audits can lead to successful innovations! For every business to thrive, it needs to innovate. The very first thing that needs to be followed for successful innovation in an audit is to identify the opportunities, which most of the organizations miss out. This is most relevant in tough times,in order to recognize new products that ensure profitability and deliver new services to existing customers rather than searching for new customers. Scrutinizing non conforming products and services by diagnosing propensities of customers are to be carried out sufficiently to input another resource to audit innovations.
Next stage is to tack on to potential solutions by interpreting customer fulfillment and product-wise missteps. Finest data analysis will assist to extract out what failed to get done for customers and what prompted to process failure, availing management a clear-cut idea of where to focus on.
Subsequently, a simple problem-solving methodology can be adapted from amassing composite knowledge, which is a key for connecting to an innovative solution. In case if a business has developed a new product, there is 99% probability that it will have a new supplier and most organizations implement new supplier evaluation through internal audit capabilities.Auditors appraise supplier’s services to comprehend the soundness of suppliers in managing and mollifying any risk, in spite of their quality management systems.
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The astounding need for molding a faster-working solution is that someone else might be working over the same issue at somewhere else. At the final stages, auditors usually forget the exact need for starting innovation, which was obviously to offer perks and value for customers by addressing their concerns and complaints.
The correct pace to innovation
A more common trend among experienced auditors is to accuse that auditing has become a regulated activity and try to dispute for a reaffirmation of professional acumen maintaining a shrewd approach to audits. The surveillance based reviews and control moves fomented by professional audit firms can themselves surpass the number linked with independent public inspections. Besides, the implementation standards and working procedures adapted by most audit firms are more copious and detailed than the standards that are set by authorized bodies such as IAASB. For innovations to succeed, majority rests with the business antecedences that the concerned firms attach to audits and the extent of participation and willingness to work for mutual agendas in setting perfect standards and regulations for future statutory financial audits.
If innovations fail to oversee the claims of existing business model and transit ruling mindsets of staff, it’s assuredly in trouble. In case of any industry that has been alive for years with the conception of an audit expectations gap and the proportional obscurity of good quality audit works, will be favored considerably from a statutorily defined audit function and have defensibly sound economic reasons for sticking on to the status quo.However, the ultimate challenge for innovation is that the auditing professionals needs to deliberately think over whether it has the certainty to revise its business models and to refurbish its traditional delivery and organizational modes regarding the provision of statutory financial audits.
Also Read : Capitalizing from Internal Audits
Sifting from BRA’s experience
The Business Risk Auditing (BRA) experience reveals that the scope for innovative notions is eminently dependent on interplays between drifting professional and regulatory concerns to have a generalized influence on audit practice. In fact, enduring innovations demands eagerness and commitments to improve various aspects of audits.
The bottom line is that innovation has greatest prospects of success if it is merged along with willingness to advance the scope of audit and to welcome the variations in facets of audit delivery, instead of accepting standardization as a legitimate requirement for innovation. The matter is all about exercising culpable professionalism and identifying values in audit beyond its codification, standardization and commoditization.
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