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Digital Transformation – Becoming the Disruptor, Not the Disrupted

todayOctober 4, 2021 777 199 4

Background

Richard Payne, Partner, capSpire

Digital has assumed such significance because this is the first time that a number of technology waves (cloud, IOT, AI etc) have broken simultaneously and at a price point that makes enormous functionality and processing power available relatively cheaply.  Combine that with other structural and societal factors like the now well-worn effect of the virus in accelerating digital adoption and it is easy to understand the view that this is now unstoppable.

 

Digital first reared its head in the period 2016 – 2017 and we saw a flurry of activity in the industry with high profile consortia investing in blockchain to improve documentary post-trade processes, significant company investment into analytics and a new start-up ecosystem.  I was chatting with one of these start-ups recently which has a genuinely powerful product, solid financial backing and executives with a track record in the industry.  He was bemoaning the lack of take-up from established players despite the logical strength of the sales pitch.  But let’s not dwell here on whether this has been a success or not and let’s ask the question of why should a commodities trader be digitising from a more strategic perspective.

One of the big premises of digital is that it is disruptive to incumbent players in all industries – new businesses use new technologies to underpin new ways of doing business that is based on speed, low costs customer intimacy etc etc.  Incumbent players respond by trying to defend their competitive position by using digital to reduce costs, improve customer service etc.  We will see who wins but we can see this battle in plain sight in for example automotive.

But this has not been the tone of the messages which have accompanied digital investments in commodities trading. What investment there has been, has been about improving trade execution efficiency and cost, track and trace in agriculture and using technology to try and recapture the trading edge that supply chain footprint used to create.  The potential terminal disruption to existing business models relying on bridging areas of deficit with areas of surfeit is not typically addressed.  Consensus would suggest that despite the masking effects of recent volatility these structural challenges have not disappeared.  It’s also debatable whether regulators and governments will allow the energy transition to be affected by potential volatility in commodities markets.  So what to do?

In simple terms, find ways of using digital to generate the cash to invest in pivoting the business towards the new opportunities the market is presenting.  What tends to happen when incumbents are confronted with structural changes is that margins compress slowly in the core business and over time erode the economic headroom to invest in new businesses.  If a trader cannot make investments it cannot fund innovations and runs the risk of its business model becoming obsolete.  However, it is no simple task to divert the net cash from a hard-built business into something new and unproven.

Pivoting to a new model is not a one-time initiative but a deliberate journey over time.  So, what are some simple pointers to help navigate the journey?

  1. Transform the core business – focus on utilising digital to make a step change in internal efficiency and costs with the specific objective of driving up investment capacity in the new.
  2. Grow the core business where there are opportunities – identify new areas of adjacent opportunity to the core business and figure out how to scale it quickly.
  3. Pivot wisely – judgement is needed to balance investments between the core and the new so that the business can continue to generate the profits In the core which fund the new.
  4. Scale the new – stay ahead of the potential obsolescence of the old business.

Easier said than done, especially for me as a consultant, and sounds simple on paper.  But what’s the alternative?   I really think this is a burn the boats moment for commodities trading.  Yes, resilient businesses with scale and access to cheap capital may well survive and even sporadically thrive in the coming years but what about when that capital reprices?  What about when producers and consumers connect directly and efficiently?  What if one result of Covid is an increasing acceptance of the need for government interventions to manage markets to speed up the energy transition?

I’ll close with one final point.  It is unlikely that technology-driven change will ever be as slow as it is today.  Renewing and transforming the core business and scaling the new is the only way to become the disruptor and not the disrupted.  It is a simple matter of survival. 

 

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