The Value Of Adjacencies
A playbook to determine how to explore adjacent growth drivers using Embedded Finance as an example.
When running a (hopefully successful) organization, it is a truism to say that focus and an understanding of the details that go into the smooth functioning of that organization really matter. Without being able to prioritise properly, and truly understand the different linkages and dependencies in place, it’s difficult to imagine how smooth performance can occur. However, what happens once these points are taken care of? Can an organisation continue to grow above aceceptable hurdle rates by focusing on its core business or should it look to adjacent (related / complementary) areas or drivers?
When approached correctly, I do believe that ‘adjacencies’ can be powerful engines of growth. By looking at areas that are complementary to the core value proposition offered by a business, it is possible to not only improve the underlying flywheel but also create a strong source of competitive advantage.
I’ll attempt to illustrate this with a basic playbook I’ve been thinking about, using the concept of ‘embedded finance’1 as an example given its recent popularity.
Step 1:
Clarify what kind of strategic problems that companies are ultimately trying to solve for:
Companies find the cost of customer acquisition and retention increasing as the world becomes ever more competitive. How can that be reduced whilst improving effectiveness?
Need to add additional value to increase their growth flywheel in a cost effective manner. All companies have a portfolio of decisions to make which ultimately informs their strategy; if there’s an option that leads to the highest ROI in the shortest space of time, isn’t it worth doing that?Â
What do consumers really care about? Understanding hierarchy of needs and ongoing behaviour to improve customer centricity.Â
Build resilience into their operating model, including around supplier strength and diversification.
Step 2:
Does the adjacency being explored actively contribute to improving or expanding points 1-4 above?
Step 3:
Determine which of the following operating vectors you want to optimize for. Your choice will then determine the specifics of your execution plan:
Customer experience ownership
Scale of revenue opportunity
Amount of operating investment required
Time to market
Number and complexity of partner relationships that need to be originated and managed
Step 4:
Analyse and solve for the following risks and gaps:
Organizational and management considerations such as capability gaps at each level of the organisation
Financing constraints
Macro risks such as regulatory / cross border etc.
Let’s see how we can utilize this framework to think about the value and structure of embedding financial services options for a non financial services firm or platform.
Strategic:
Financial services options such as embedded loans and payments can be a powerful engine for improving the lifetime value of a customer. Marketplaces have used this to great effect to improve average order and basket sizes, as well as increasing retention as customers can smoothen their purchases over time.
Vehicle/car manufacturers have been very successful in offering credit options at the point of purchase, improving acccess and affordability to what is a typically high value item. This has materially increased the velocity of their growth flywheels.
For Shopify, a focus on customer centricity made them realise that offering an easy banking model would allow their customers to spin up their e-commerce offerings faster. Enter Shopify Balance, which allows Shopify store owners to ‘skip the bank’ by getting paid faster and eliminating the need to open a separate business bank account. It also offers a debit card with exclusive rewards for purchases made towards growing a Shopify business.
Supermarkets have been offering supplier financing for many years, enabling them to support their supplier base and make sure there is sufficient ‘slack’ in the system.
Operating:
If you value customer experience most, then focus on making sure that terms of engagement are defined clearly with respect to customer data ownership, flexibility of end customer experience and strict Service Level Agreements (SLAs) in place with respect to service quality from the embedded finance partner.Â
If you are optimizing for scale of revenue opportunity, you may need to build a plan that allows you to invest heavily in the other four aspects, which will take time and can lower your immeditate cash return or internal rate of return, as creating scale with embedded finance options takes time.
If you value cost minimization, negotiate heavily on fee levels and structure with banking / balance sheet partners, minimizing the effect of expensive tiers of consumption based pricing (or setting fixed tiers or other types of pricing mechanisms at fixed levels that are reasonable in nominal terms) and ensure that price escalation clauses are not built into the contract or are also minimized.Â
If you value time to market, make sure that you have full flexibility over integration terms and effective support to help you iterate around the actual steps of delivery, as there will be adjustments that need to be made.Â
If you are willing to undertake complex partnerships, make sure that there is you have sufficient resources to deal with the structuring and ongoing maintenance of them. It may also be worthwhile to create a plan of prioritisation and milestones - determine which milestones can unlock greater complexity and economics and at which point in time with specific partners.
Risks:
Integrating financial services options into a flywheel will necessarily be different to what the core team is familiar with. Attention needs to be paid at making sure the right capabilities are in place at all levels of the organization.Â
C-level capabilities (E.g. managing T-shaped people, hiring and managing financial services subject matter experts, financial services regulatory and operational knowledge, business risk modelling taking into account cyclical macroeconomic factors that financial services are exposed to and which may change the cyclicality of the business model)
Functional leaders (E.g. coherent understanding of business processes, including customer experience journey mapping and execution that now includes financial services applications, partner management, enhanced training and enablement for mid level and front-line staff)
Mid level management (E.g. customer services issues that now encompass financial services related matters)
Financing considerations:
Does embedding financial services capabilities mean that there will now be less reliance on working capital financing?Â
Does more capital need to be raised for investing in capex or is all spend opex?Â
Regulatory / cross border issues:
How do you deal with implementation of embedded finance in a region as diverse as Asia?
Any specific local regulatory restrictions to be aware of?Â
A non financial services firm or platform directly offering financial services as part of their overall value proposition to either customers and/or other players in their ecosystem (e.g. suppliers). Put simply, embedded finance is the placing of a financial product in a nonfinancial customer experience, journey, or platform.