The Bottom Line: Revenue Management Trends and Best Practices

Revenue Management Intelligence Rocks Rainmaker 2010

Model N's sixth-annual RAINMAKER Revenue Management Conference is winding down at the Ritz-Carlton, Laguna Niguel in Dana Point, CA. More than 350 attendees from the Life Science and High Tech industries spent three days in the sun (mostly) talking about navigating change in a rapidly evolving business climate.

Model N's Revenue Management Intelligence framework, which delivers retrospective, opportunity, and predictive analytics, had everybody excited, especially after hearing BSC's experience with Model N's retrospective Performance Analytics application.

On the high tech side, Atmel and Dell had well received sessions on transforming sales orgs with BI and managing multi-channel incentives respectively. Check back for more news and stories from this year's RAINMAKER.

Semiconductor 2010: Divergent Opinions

I would fall over in a dead heap if all the pundits and organizations that forecast the semiconductor sector ever agreed on the outlook for the industry. However, there is usually a somewhat unified higher level vision of what is going to happen over the ensuing dozen months or so.

At this point in time, there doesn't seem to be much of a unified vision as to what 2010 holds. There is the optimistic camp that sees low inventory levels, promising new products, rising stock prices, etc. and forecasts a banner growth year, at least over 2009. There is the pessimistic camp that looks at high unemployment rates, tight capital, and strained capacity and forecasts that 2010 might only be slightly better than 2009.

The only thing these two camps seem to be able to agree on is that neither has a very high level of confidence that their position is correct. This rapidly moves beyond the theoretical to the practical for people running companies. They must decide whether it's "off to the races" or "hunker down and survive." 

I believe this uncertainty will continue to be the major driver for the semiconductor industry for the foreseeable future. From a people perspective, this will translate into a reticence by CEOs to commit to permanent headcount additions and their continued use of contract personnel and consultants at all level in the organization.

Upgrade Systems Now?

In our consulting practice, we see a wide variety of systems in use to support various business, operations, and engineering functions. Business systems range from Quickbooks Pro to fully implemented ERP systems.  Yield management may be handled with Access databases or sophisticated yield analysis tools. Supply chain management may be handled with Excel spreadsheets or powerful supply/demand software.  And the list goes on... When a company is small, many things can be done somewhat manually.  As the company grows and becomes more complex, however, it is difficult to effectively use brute force to manage many different functions. Employee hours balloon, mistakes are made, and customer service levels erode.
 
There is no "zero impact" time to upgrade systems. It requires the involvement of key players throughout the organization to ensure that the potential benefits are achieved. Many companies reason that we can handle things manually now, so we'll wait until we can't and then upgrade. The problem with this strategy is that when things pick up, everybody starts working longer hours just to get the job done. Now on top of that, you expect employees to spend several hours per week doing the things to get ready for the changeover. Though the system will save time when up and running, it creates a greater load on people during the installation. I could go on and on about the consequences, but you probably get the idea. I offer up an alternative for consideration. We believe that it is more effective and less painful if the systems are upgraded before the environment is hectic chaos.  I think in most instances, the set-up and implementation will be better and employee attitudes about the system will be more positive. I liken it to changing the engine on a 747: it is much easier to change on the ground than in the air. 

High Tech: Are People Getting Hired?

At the risk of being redundant, the answer to this questions many times is "It depends." We're already beginning to hear the words "jobless recovery" bantered about for many industries. Generally, we do not believe this will be the case for the semiconductor industry going forward. There are currently positions being filled every day. It is not a large number, but there is hiring going on.  Most of these positions fall into one of two broad categories. 

The first category includes positions that are high level and strategic in nature. A company needs to replace a CEO or bring on a CTO to focus development. These type positions tend to be filled whether times are good or bad. The second type ties more closely to the level of business. As business strengthens (or appears that it might) companies may add technical resources (designers, apps engineers, etc.), sales staff, or operations personnel.

There is a great deal of caution these days in adding staff due to the uncertainly about the level and stability of future demand. For many fabless companies, this problem is exacerbated by dwindling cash with a dim outlook for future funding rounds. It is "hang on to what you've got" and try to stretch the current organization as much as possible. However, there are fabless companies with significant cash reserves and strong demand that are adding staff.

As with the "it depends" above, much of hiring depends on the supply chain segment, product technology, and end-market focus. 

Are We in the High Tech Upturn?

As much as everyone would like a simple yes/no answer to this question, more often than not, the answer is "it depends." For starters, the total supply chain has several segments, each having relationships to the others. The biggest chunks are semiconductor device companies (both fabless and IDM), manufacturing providers (foundry, probe, assembly, test) and equipment and materials suppliers. The device companies typically see the changes first, then the manufacturing providers, then the equipment and materials providers. Because there is lagtime in the system, the changes get amplified and the equipment guys (caboose) may not realize what's going on until after the device guys (engine) has already left the track. 

A second factor is which device segment you're involved in. During this downturn, the memory guys have been particularly hard hit because of a massive overbuild of capacity that led to price wars that scuddled all hopes of profitability. Other segments (e.g. microprocessors, logic, analog, discrete, etc.) were impacted to varying degrees.

The third factor is end market. The growth rate in PCs, cell phones, consumer products, automotive, etc. have different growth rates, inventory positions, etc.

All that being said, most forecasters are guardedly optimistic about the coming months for most market segments. Some fear there may be relatively minor correction after the end of the year, but generally see positive growth over the next couple of years. A word to the wise, as with car mileage estimates, "your results may vary."

Better than Expected Bad News is Good News

Gartner has lifted its 2009 revenue forecast for the world semi industry to -17%, up from it's previous prediction of -22.4%. In this economy, less bad is good!

Gartner cited economic stimulus money in China and price reductions in consumer electronics as having a positive influence on demand, but also indicated that price reductions from the device manufacturers themselves were a contributing factor. 

I'm curious to understand what semiconductor and component products are being discounted and why.  To move obsolete inventory or discount products that are nearing obsolescence, it makes sense.  But to try to use price to stimulate demand is a short-term fix at best that has long-term negatives for prices and margins across the board. But that's what we get when prices are so tightly coupled to manufacturing economics. Until the industry can move more towards a value-based pricing model, pricing and margins will continue to get excessively battered in both good times and bad.

KKR & Silver Lake Partners Leverage Revenue Management to Increase Gross Margins at Avago

Bruce Richardson's blog about Avago's IPO

We have been talking about the non-linear impact of gross margins on the market cap of semiconductor and component companies for three years now. Avago's IPO provides a fantastic example of how private equity firms - KKR and Silver Lake Partners - can turn a valuable asset into a highly profitable asset.

For more reading on why CFOs need to pay attention to the strategy that has worked for multiple companies, read this White Paper for CFOs.

Price Execution: The Weak Link in Launching New Semiconductor Product

Sergis Mushell, a semiconductor analyst at Gartner, has published a couple of interesting papers on “marketing essentials” that focus on the evaluation and commercialization phases of entering new markets and new product introduction. The challenge that product marketing and product line managers face in defining, managing, launching, and pricing new products and product lines is how to achieve dominant market share (50-70%) while continuing to deliver expected revenues and margins throughout the product life cycle.

 

While pricing, i.e. price setting, is an area that receives a lot of attention during the planning phase, price execution is often the weak link that leads to premature and unnecessary price erosion. Inconsistent pricing and quoting across multiple regions and channels is a common problem and is quite easy to do given increasing globalization, often opaque business transfer processes, and the complexity of pricing models that are executed between a manufacturer and OEMs, distributors, and EMS.

 

Some pricing “noise” is inevitable, but when it’s not managed and controlled, excessive noise only encourages price shopping and more aggressive negotiations that drive prices down farther and faster than are needed to win or maintain market share. It’s a problem in general, but it can be especially damaging when different channels and regions issue different and inconsistent quotes against the same opportunity, effectively putting the semiconductor manufacturer in a situation where it is competing against itself. When looking at the impact to margin contribution over the entire product life cycle, accelerated price and margin erosion can easily cost companies millions, if not tens of millions, of dollars. 

 

Therefore, many companies strive for a good plan that is well executed vs. a great plan that is poorly executed. To mitigate the risk and impact of price erosion, Gartner recommends that companies deploy ERP, CRM, and revenue management tools to manage multiple price lists, price rules, market price programs, contract pricing, and pricing exceptions and alerts.

 

The Gartner report, “Marketing Essentials: How to Create a Successful Business Plan for a Semiconductor Product Line,” can be found at http://www.gartner.com.

Lessons from the Front Lines of High Tech Globalization: Currency Matters

Global chip sales were — not surprisingly — down again in Q1 2009. While we wait with baited breath to see which prognosticator has correctly picked the rebound (some say we’re at bottom now), it is worth considering the crucial role currency exchange rates can have on manufacturers’ bottom lines, especially in an economic slowdown.

Changes in currency exchange rates can have a notable impact on revenue when converted to a common dollar basis.  According to market tracker iSuppli in a recent EE Times article, dollar denominated revenues of European headquartered suppliers have declined 44.5% since the third quarter of 2008.  In euros, however, supplier revenues only fell by 36.1%. 

Japan, which suffered a 43.5% revenue decline when measured in dollars, experienced a 51% decline when measured in yen.

While many suppliers can hedge their exposure to currency fluctuations, the relative movements of prices based on exchange rates can amplify and accelerate price and margin erosion when not properly managed — especially when accompanied by sharp increases or decreases in actual demand.  Moreover, it creates a reallocation of regional demand based on arbitrage opportunities. Now more than ever, systems and processes to manage prices in multiple currencies across multiple regions are essential for protecting long-term revenue. The technology has been there for a while, but this severe downturn may make global semiconductor and component manufacturers realize they need to pay attention to the foreign exchange market and devise methods to hedge against its revenue impact.