Founded in 1926, US-based McKinsey & Company is a global management firm with 130 offices across 67 countries. The firm specialises in advising some of the largest international companies across every sector and industry on several functional areas including strategy, operations, and finance. Over the last decade, the firm has built capabilities around advanced analytics, digital and design.
“The firm does much more today than focusing on strategy. We do that work as well, but more often now, we partner with companies to transform their organizations and build enduring capabilities,” said Ganaka Herath, Managing Partner at McKinsey’s Sri Lanka office. He is currently responsible for one of the largest advanced analytics transformations in Asia. In another instance, the firm has been engaged by a large Sri Lankan manufacturer to triple its performance. “We help companies transform. We do not merely advise companies but actively partner with them through to implementation” he said. With a wealth of expertise and deep industry knowledge, McKinsey is well-positioned to help businesses through the unfolding Covid-19 pandemic.
Everyone is concerned about getting through this economic crisis. How should businesses approach this?
Businesses need to come out stronger than they went into this crisis. While everyone’s fortunes are linked with those of the overall economy, we do see several companies and industries break away from the economy, and this is now termed a “K-shaped Recovery”. Amazon, Disney, and Netflix are examples of this as they are radically outperforming the market despite the effects of the global pandemic. Then you have the industries going in the opposite direction such as tourism, airlines, and financial services. Businesses impacted by the Covid-19 economic slump need to first ensure its survival and take care of its employees and customers.
The next step is to streamline operations for better efficiency and dynamically allocate capital. Companies need to quickly divest from unyielding businesses so they can ride out the crisis with enough cash and invest in areas that will generate returns just when the recovery starts and before anyone realises there is an opportunity. The next stage is about strategy and resetting for the future. I believe there is an opportunity for all companies everywhere now, because of Covid, to start taking stock of themselves at a fundamental level.
In your view, what does it mean to reset, or re-strategise?
A strategy reset applies to any business, but the question is whether it is the right thing to do. Most people believe the performance of a company depends on having a strategy, but this is not true. Three factors drive performance: trend, endowment, and moves. If you are in the tourism industry right now, a strategy reset is unlikely to yield much benefit because the industry is caught up in a negative trend due to the Covid-19 travel restrictions. Alternatively, you could reorient your strategy to containing costs and generating cash flow to keep the business afloat. What we mean by endowment is where a company may have enough capital, tech expertise or a fantastic asset such as Google and Facebook, for instance, that drive growth. The third aspect are the moves companies make that can drive performance by faster and more radical capital reallocation, acquiring another business, or divesting from businesses that are not generating value.
In the context of surviving this pandemic-related economic crisis, businesses first need to be operationally sound before thinking of resetting their strategy. You need to evaluate your business and streamline it to be operationally efficient. At the same time, you need to take care of your employees, customers, suppliers, and investors. Next, a business must start thinking hard about its revenue profile and how to ensure a sustainable cash flow if the crisis deepens, and also how to engineer a fast recovery because this pandemic is not going to last forever. What is the best way to capture that revenue? Do you have to enter a new space? Is technology working for you? Do you build new capabilities and acquire talent? A business needs to ask all these questions and more to figure out how to expand its revenue sources in a post-Covid environment because that will ultimately define success.
Do you think businesses here understand their revenue profiles well?
I believe it is hard for most businesses to truly understand how revenue profiles are about to change. And in Sri Lanka, I think the challenge is unique where some of our clients tell us that online sales surged during the lockdown and then dropped back to pre-lockdown levels again. This is different to the experience of most other countries. Digital commerce increased from 2% of total retail to 10% in China during the pandemic, before dropping back down to around 6%. Sri Lankan businesses assume that retail will go back to where it was before Covid-19 with in-store footfalls recovering and that online sales will not be a significantly higher portion of revenue – this could be a mistake.
Sri Lanka will eventually follow the trend seen elsewhere and move towards digitalisation and data analytics because businesses will want to keep pace with shifting consumer expectations
Online sales are depressed because, today, most sites and platforms do not provide an outstanding user experience, so there is an opportunity here to retain and grow an online customer base. Companies like Daraz, Pickme and Uber are a few examples of how successfully this can be done. As other businesses improve user experiences on their platforms, more people will use them. Before long, the anticipated shift to digital will happen, and companies would not want to be caught off guard and overtaken by its competitors.
What are those trends that will shape the future of this country?
We will see a fundamental change in how consumers behave. The Covid-19 lockdown forced many people who never used digital channels before to use them. What this does is more people becoming aware of the possibilities. Soon they will expect their banks to offer the same seamless experience and service that, for example, Amazon offers. Eventually, people will begin to demand efficiency, safety, and speed, and they will not only want more digital offerings, but the user experience has to be great too! The shift will be a huge one, and companies need to move quickly to avoid the risk of being irrelevant.
We will see a period of low demand until the Covidimpacted economy starts to recover. People are going to be more concerned about saving, and businesses need to deal with that. Sri Lanka will eventually follow the trend seen elsewhere and move towards digitalisation and data analytics because businesses will want to keep pace with shifting consumer expectations. For instance, companies will use data in different ways to understand customers better. Elsewhere in the world, companies use data to understand their customers and to target them with tailored goods and services to meet their needs and wants. Sri Lanka has a long way to go down the digitalisation road, but the shift will be sudden, companies must start thinking about how best to leverage data today.
How should companies be investing in technology and innovation?
No one disputes the importance of digital but investing in technology is easier said than done. A company should consider three questions before considering an investment. The first question businesses should consider is: What is digitization intended to achieve? What is the customer problem that you are going to solve with this investment in digital? It is critical to know why because far too many companies invest in technology without carefully considering the end-result. Our research shows that 55% of digital investments get stuck at the pilot stage, and 75% of all large-scale digital transformations at firms have failed. The second question is about value. You need to know why you are investing in digital technology, know who your customer is and what value you hope to deliver to your customer and business. The third question a business needs to ask is around delivery; how am I going to deliver this technology investment? For instance, many companies invest heavily in technology which can take several months or even years to develop, test, and deploy. But technology changes fast and what is necessary now, may be obsolete then. Therefore, companies need to be able to be more agile in terms of delivery. You need to invest in short bursts, put things out to the market and get feedback from customers and end-users fast so you can either change track or progress to the next stage quickly. This way, you ensure the technology investment is delivering results for the present and also future-proofing your systems to keep pace with the ever-evolving technology landscape.
While there are companies with impressive digital products, I would like to see a sharper focus on customer needs when delivering solutions. Many invest in digital solutions without an end -consumer or a problem that needs to be solved clearly in mind. We help clients overcome this challenge by first considering customer journeys and augmenting them with data analytics. At McKinsey, we believe very strongly that companies should not simply aim to create large stores of data and then figure out what problem can be solved with it. Instead, the approach is to identify the problem and then look for the data needed to solve that problem.
As a company gets larger, it will have a voluminous collection of data which can add meaningful value to consumers, customers, employees, and other stakeholders if analysed in a meaningful way, and this is especially important.
Our research shows that 55% of digital investments get stuck at the pilot stage, and 75% of all large-scale digital transformations at firms have failed
Covid-19 has hit tourism the hardest. What should hotels and travel companies in this sector be doing right now?
The crisis is severe, but it is time-bound. It is hard to see when tourism will see a complete recovery, and it all depends on how fast we deploy the vaccines for Covid-19 and how much behaviours will have changed with regards to travel. At McKinsey, we are engaging companies and working with them to plan for a revival in tourism which will surely come. At this stage, these companies must have a people-oriented strategy because they should not lose their best people. It would be tempting to lay off employees at this moment, but when the recovery comes, you will need your best people to help you bounce back. Cost-cutting is needed, but it must be done correctly to avoid cutting too deeply, beyond fat into muscle, hampering a company’s ability to recover.
Now is also a great time to invest. Capital investments can take multiple years to realise returns, so there is an opportunity to have assets come online as the revival of the sector gathers pace. While the pandemic will end, the world will be a different place. It is not going to be business-as-usual for the hospitality industry because people will have different expectations. As a business, industry and country, there has to be a lot more thought going into what the Sri Lankan tourism offering of tomorrow is going to be.
Among McKinsey Sri Lanka’s clients are the top 50 companies in the country. So, when you talk about cash flow management during a crisis, what are some of these companies missing?
Many of the top companies have sophisticated understandings and processes to deal with their cash flow, and have experience of dealing with major uncertainties in the past. We work with clients to help strengthen their cash flows through a variety of approaches, including scenario analysis which includes understanding multiple scenarios that the business could experience and helping plan for them. We proactively engaged the top 50 corporates in Sri Lanka through webinars and dialogues on how to manage cashflow through the Covid-19 crisis and how to analyse the scenarios they are most likely to encounter as the crisis deepens. This is a critical step because strategic planning under the extreme uncertainty brought on by the pandemic was, and remains, challenging.
Where do you see Sri Lanka’s economy three to five years from now?
The strategic location of the country remains enviable, with one of the fastest-growing regions in the world at our doorstep and with half of the world’s oil shipments passing just 400km away from us. That kind of proximity together with our pool of talent and the world-class businesses in the country give us the opportunity to participate in international value chains and access exciting markets such as China, India, and the Middle East. If we can do that, we will unleash tremendous potential. I would also like to see a fair Sri Lanka in terms of gender equality and inclusivity, which would unlock some fantastic economic gains. We need to have a far more digital and tech-enabled economy, where consumers have great experiences, inclusivity improves, and allow businesses to make data-driven decisions that will lead to better products and solutions for both local and global markets.
We need to be more integrated with South Asia and the Asia Pacific regions, and digital technology will enable that. There are two approaches to building a digital economy: one is to develop the supply-side and the other, the demand-side approach. The supply-side involves building the technology itself or the software. The demandside approach is about enabling individuals and companies to effectively utilize digital technology: PickMe is a good example of a company that is radically changing how Sri Lankans demand for digital solutions.
Few countries have done both, with Estonia being a good example of one that has. India excels on the supply front and has a massive scale advantage, so while not impossible, it is difficult for Sri Lanka to be competitive on supply. What we can do instead, is to improve access to digital solutions for individuals and companies enhancing demand.
Equal access to data needs to be democratized so that every size of business can access public data and build better solutions, and people can improve their lives. In banking, for instance, digital technology can potentially double the size of the industry by improving access to financial tools and products and helping increase the availability of credit to a wider proportion of the population.
Today, Sri Lanka has a credit to GDP ratios of approximately 50%, less than half that of countries like Malaysia and Thailand. In agriculture, where 25% of the population is employed, farmers could be trained to use digital technology to make better decisions about crops and to understand demand signals from the market, so they know which crops to produce.In the case of tourism, it is about smaller hotels and experience providers using tourism data to create better targeted products to meet the needs of travelers. While a lot of work is underway, I feel Sri Lanka can still do much more to enable a digital society. One thing that can add value is to try and look at the “Superstar Effect”.
What is the Superstar Effect?
The superstar effect describes companies, industries and cities that are outperforming others and continues to add a great deal of distance between them, and this distance keeps growing. Superstars capture the largest share of a market, profits, or people. On average, the superstar companies earn seven times the revenue or generate more than two times the return on capital investments. The companies, industries or cities share a few characteristics: they tend to be highly digitally-enabled and deploy advanced analytics to enable data-driven decision making. These firms possess the best talent, have vibrant innovation engines, and go through technology lifecycles amazingly fast. Retaining superstar status is tenuous, and companies do not get to enjoy that position for long because they tend to get replaced often, there is always someone else catching up to knock you off your perch. In this context, Sri Lanka needs to reflect on which industries to assist and where to commit resources for optimal outcomes. You do not want to be investing in sectors that are not going to be able to grow fast and sustain themselves. In terms of cities, Sri Lanka needs to develop those that have the potential to become economic hubs and can uplift the economy.
Sri Lanka needs to continue to foster an outward-looking mindset. We already have global companies of Sri Lankan origin, but there are not many of them. There is also an opportunity to uplift the SME sector to a level that can transform the entire economy. There are many great SMEs with wonderful products, how do you get them to the next level? Think about it: what is the target market for a small manufacturer in Kandy? Is it the citizens of Kandy, including the tourists, is it people living in Colombo, or is it everyone who visits Amazon or Flip Cart?
We need to start by teaching SMEs to access these platforms and other technologies, but that alone is not enough. The enabling payment systems, first-and-last mile logistics, and other processes and procedures that enable trade must be improved, so these are policy-level enablers that need to be put in place. SMEs will then have to start thinking about who they are competing against and strategise around marketing, packaging, and pricing.
How can gender equality help transform the country’s fortunes?
I believe people do understand the value of gender equality, and everyone can agree that 50% of the global population should not have a different experience at work or access to opportunity. From a moral perspective, that is simply wrong. We looked at the data for Asian countries and our research estimates that if economies in the region achieved the same level of female labor force participation as the best performing country in their cluster, it would generate an additional $4.5 trillion annually to Asia’s GDP: that is the equivalent of adding Germany and Austria to Asia’s GDP every year! If Sri Lanka achieves gender parity, its GDP will expand by $10-12 billion annually. However, the challenge is sustainably improving gender equality, because few appreciate its complexity. Most people believe it has to do with creating opportunities at the workplace, and yes, it is a big part of the solution. However, Sri Lanka needs to have social infrastructures and services to support women. Do companies offer creches, do we have an efficient and safe transport system that allows women to travel to work, does Sri Lanka have childcare infrastructure in place so women can focus a bit more on their careers? Do women have the right legal freedoms and political voice?
Sri Lanka performs relatively well in terms of infrastructure and safety but does poorly in terms of political voice and legal protections for women. Sri Lankans must change their attitudes towards women and work. In this part of the world, half the population still believe that a child suffers when a mother goes to work: this is neither fair nor right. It not just about getting women to work, but also moving those in part-time work to full-time, and then upskilling their roles and responsibilities.
Digital technology is a great enabler when it comes to fostering gender equality. Work-from-home and remote working can empower working mothers, significantly increase women participation in the workforce and enable greater mobility. Women entrepreneurs can access global value chains if the digital infrastructure and other pieces are in place, so this is an important step that Sri Lanka needs to take if it means to transform its economy.
Sri Lankan banks can do a lot more to deepen their financial services, and by just doing this there is potential to double the size of the financial sector
Your clients are probably some of the trendsetters in this market, corporates that everyone else can look up to. In that context what are some of the typical problems that they are trying to solve, before Covid?
The primary problem for many of these marquee companies is how to grow their domestic market share and build global brands. McKinsey partners with companies in several ways but let me just talk about one. Advanced analytics is one way that Sri Lankan companies can really start leapfrogging their competitors in the region or those in the domestic market. There is a lot you can do with advanced analytics. For instance, if a company experiences high customer churn, they can use analytics combined with machine learning to target and identify those customers most likely to leave in any given month. That gives you an advantage over everybody else in the industry instantaneously because you are focusing all of your efforts on just the customers who are going to leave rather than across your whole base.
Banks in Sri Lanka have a low cross-sell ratio, advanced analytics can help them identify the next best product for each of their customers. It is not about just selling another product but offering something that is useful to customers. It is similar to Amazon; you get product recommendations based on machine learning models that match your needs.
Financial institutions in Sri Lanka had been performing fantastically well before 2019, however the Easter Bombings, and now Covid-19, have impacted credit cycles. For a market like Sri Lanka, the use of advanced analytics can be one way to help unlock the credit potential of the country. Financial services penetration is high but in terms of depth, it is incredibly low. Most people have just one basic savings account or current account. When we work with banks, we help them create more depth by extending short term loans or credit cards for instance, and this improves overall financial inclusion in society. Sri Lankan banks can do a lot more to deepen their financial services, and by just doing this there is potential to double the size of the financial sector. Banks are too conservative in their lending and the collateral requirement, and interest rates are quite high.
Advanced analytics and machine learning can help banks target borrowers who are most likely not to default and they can offer loans at more affordable rates. This uplifts the amount of credit in the market and a lot of people benefit, not just the banks. For the first time, in 2019, credit growth in Sri Lanka started to decline. That is not a good thing. For a market like Sri Lanka, credit growth matters, and our approach avoids ballooning the subprime kind.
Let us take the manufacturing sector. There are companies that are remarkably effective in what they do, and they have expanded operations overseas too, but there are still opportunities to be discovered. This is true for any company. Most people think growth can only come if they enter overseas markets, or acquire other businesses, and while this is true, we believe there’s a lot more opportunity in the domestic market.