How Can a Whale’s Tail Guide My AI Transformation Efforts? Part 7

AI Landscapes: Redefining Commerce, Careers, and Communities - Article 7 of 8

Reimagine How You Do Business

Winners of past disruptions have shown us how technology can be used to make fundamental changes to accepted operating models that upend the status quo and force incumbents into a defensive position. Here are two examples:

• Globalization. Technology and reduced transportation costs made the world a lot smaller in the 90s. Adopters of this trend were able to dramatically lower the cost of production, giving them a competitive advantage.
• Uber. Advances in handheld technology converged location, communications, and purchasing data. These changes were leveraged to produce a whole new mode of transportation - rideshare. Customer acquisition became easier, staffing and capacity issues were crowdsourced, and a community rating feature provided a sense of safety with the change. Incumbent taxi operators were crowded out of the new, redefined market.

In both cases, incumbents lost agency. They were behind the change and had to react. Manufacturers went out of business or were hastily forced to move production, devastating communities. Our nation is highly polarized today, in part, due to firms not being aggressive enough in embracing change and not being deliberate in developing and protecting our workforce. It doesn’t have to be this way.

The AI learning pathway described in Part 6 helps employees explore how AI could change their roles. The same curiosity can extend to how the whole business operates. Where could AI enable a different way of serving customers? If you already know how—you’re in great shape! The rest of us need a method to uncover and explore opportunities.

Understand the Full Cost of Serving Customers

We recommend beginning with an analysis that accounts for the full cost of serving your customers. Companies today all engage in some form of this, but we have a few suggestions to encourage a different perspective.

• Net, not gross. Gross margins are most popular across multiple industries for gauging how products and services are delivered. Revenue minus Cost of Goods Sold has been a mantra of financial management for eons, but it misses the full picture of the total cost of doing business. It is not unusual for us to see product lines with healthy 35% gross margins be redefined as negative margin business.
• Product, or service, level. Individual products and services will have different cost profiles. Include them all. It’s possible to attribute overhead costs to products and services by weighing them against the products or services produced.
• Customer aggregation. Once a method for assigning overhead costs to products and services has been devised, the data can be aggregated to the customer level, providing a clear view of the real cost of serving different customers. We know customers are different, but it’s hard to see how their differences impact profitability without undertaking this exercise.

What the Whale’s Tail Reveals

We then create a graph ordering the customers left to right in order of declining profitability and create a plot line of cumulative net margin. No matter the client or industry, we always see the same shape:

The visualization gives us four useful ways to think about the customer base:

• Value Drivers: Customers who generate a large share of net profit.
• Value Contributors: Customers who add volume and some additional net profit.
• Complexity Drivers: Customers who add volume but little or no additional net profit.
• Value Destroyers: Customers whose cost to serve exceeds the revenue they generate. They are eating into the bottom line.

The point is to understand where your current operating model works well and where it struggles. A customer who is expensive to serve today may present an opportunity to develop a different approach.

Use the Findings to Explore AI Opportunities

The Whale’s Tail helps focus the AI conversation on specific business challenges. Where is complexity driving cost? Which service demands are difficult to meet profitably? Could a different way of working change those economics?

In Part 8, we explore where to start developing the operating model of the future—and why customers at the declining end of the curve may offer a useful starting point.

Thanks for reading. Let’s talk AI implementation. Send me a note at wade@batonglobal.com.

About Wade Britt‍

Wade Hampton Britt, IV is a partner and the Managing Director at Bâton Global. He has lived and worked in a dozen countries in the global express and edtech sectors before joining Bâton Global in 2016. Wade is passionate about helping clients and their communities navigate the AI disruption better than previous technological changes.