How asset-light strategies and models can boost business growth

EY Asset-light survey result

Analysis shows asset-light companies have outperformed their peers on total shareholder return over the last five years.

More than half of February 2021 webcast respondents believe that digitization and innovation are the key drivers for considering an asset-light strategy.

Where do companies realize asset-light model benefits?

Analysis shows asset-light companies outperform peers on total shareholder return

Ernst & Young LLP research of US Fortune 500 public companies across several sectors shows that asset-light companies achieved a greater total shareholder return when compared with their asset-heavy peers. We define asset-light companies as those that have a five-year property, plant and equipment (PPE) to sales ratio average lower than their respective sector mean. On average, the asset-light companies outperformed their asset-heavy peers by four percentage points in the last five years of total shareholder returns. Sample selected sectors are highlighted in the graphic below.

Asset-light companies outperform their asset-heavy peers

The Full Potential Paradigm is EY-Parthenon’s proprietary tool that provides an objective and quantitative point-of-view to set performance targets, prioritize investments and mitigate risks.

Choosing the product category can help determine focus

Capability-level analysis for the chosen product category can help determine the right focus areas, what is possible for that capability set and the right partnership model (e.g., JV, spin-off, partnership, sale-leaseback). Capabilities are assessed in terms of the relative strategic value delivered to the customer and the company. We have observed four primary dispositions:

1. Core capabilities (top right of the chart below) – These are critical capabilities that are usually ripe for growth and innovation. In other words, if your company doesn’t have these in-house today, executives may consider proactively looking for players to help fast-track innovation.
2. Non-core capabilities (bottom left) – In this quadrant, it often advantageous to actively package assets and capabilities and look for a partner that can operate these more efficiently and allow the company to focus on other “core” areas.
3. High value corporate capabilities (bottom right) – These are of high strategic value to the company, but the customer doesn’t place an equal degree of value on them. With these capabilities, traditional cost and capital optimization efforts generally deliver value. However, it is important to keep these capabilities on the radar for potential future deals.
4. High value customer capabilities (top left) – These capabilities are of high strategic value to customers. If they’re not available in-house, the partnership should be structured such that the company has a significant influence to drive high quality and service levels.

Capability map analysis

Note that a capability non-core to a company can be core to another, which creates the “win-win” situation for all parties.

In the Ernst & Young LLP February 2021 webcast poll, 34% of executives said enabling functions would be most suitable for an asset-light strategy, followed by middle office at 22% and front end at 24%.

EY asset-light strategy survey result

Asset-light strategy journey

A typical asset-light journey can take 12 to 18 months. However, a rapid four- to six-week effort to short-list target capabilities can place companies on the right path to conduct an ecosystem scan for potential partners and build a business case that demonstrates the benefit. 

Asset-light lessons learned from the field

For companies undergoing an asset-light review and transformation, developing consensus and buy-in among key internal participants can be challenging.

“In my experience, there’s often tension within companies when undergoing an asset-light assessment. For some people, this is a controversial subject. It’s sometimes viewed internally as a defensive move — a way to cut costs and drive earnings quickly. In reality, this is about making smart choices and better companies. It can be a real win-win,” says Appelo.

February 2021 webcast participants also shared their biggest challenges related to executing an asset-light strategy, with 31% saying finding the right partner is the biggest challenge, 27% saying structuring the deal or partnership, and 25% saying aligning internal stakeholders.

Companies that embark on this journey with strategic partners should prepare for how to manage barriers. Key considerations include the following:

Scoping and evaluation

• Evaluate all products and services, businesses and capabilities, and geographies — nothing should be considered sacred.
• Build and monitor the joint business case with various scenarios, covering multiple years and several iterations of proposed “transfers.”
• Properly weigh benefits (e.g., cash release, return on assets improvement and reduced complexity) with operational challenges and risks (e.g., quality, disconnect with customer and brand image).

Deal structuring and enablement

• Determine carve-out considerations for the seller and stand-alone integration activities for the buyer to allow for a smooth transition.
• Prepare required opinions, operating manuals, documentation and commercial legal agreements to activate the new inter-company operating model.
• Consider go-forward transition service agreements, take-or-pay arrangements and intangible asset valuations as part of divestitures.

Tax and accounting

• Consider the operating model impact in asset-light environments from a tax (direct and indirect) perspective, including value-added tax, payroll registration, income tax and customs, global asset sales and currency impacts, preserve and extend tax rates, etc.
• Evaluate the financial impacts of the deal to avoid surprises on go-forward reporting, including cash flows and accounting considerations for both the buyer and seller.
• Structure asset sales in a tax-efficient manner. Consider the degree to which the continued dependencies in the operating model (e.g., outsourced manufacturing) create “control” from a tax perspective with the associated requirements of arms-length transfer pricing.

Collaboration and governance model

• Collaborate early with your asset-light partner on the future state operating model and governance with a common vision (e.g., greater speed-to-market, overall costs reduction).
• Clearly define the partner pricing mechanism and method for tracking value levers — both quantitative and qualitative to avoid long-term price arbitrage.
• Avoid unnecessary or redundant oversight, controls and incremental costs.

EY asset-light survey result

What do you think are the biggest challenges related to executing an asset-light strategy?

Nearly a third of February 2021 webcast respondents believe that finding the right partner is the biggest challenge.

Lastly, it is important to note that the strategic, financial and operational objectives for sellers and buyers may differ in a transaction. One party may be focused on improving return on invested capital and releasing capital for redeployment, whereas the other may be focused on improving the overall operational efficiency and utilization of assets. Knowing each partner’s value drivers before an arrangement not only speeds the process but allows both parties to achieve their often unique and potentially divergent desired outcomes.

Conclusion

Asset-light business models are expected to be increasingly adopted by companies across the value chain well beyond the current COVID-19 crisis. This is in response to an increasing need for innovation, maintaining liquidity, and building more agile and resilient operating models. When all partners in an ecosystem work together to create customer value – with capabilities aligned to better or best owners – it creates a winning value proposition for all participants. Companies that proactively seek out opportunities can benefit from a first mover’s advantage and, ultimately, create a competitive differentiation to outperform their peers.

Thanks to Wim Appelo, former Worldwide Vice President Supply Chain, Strategy, Innovation and Deployment, Johnson & Johnson, and a leading authority on business transformation, for his contributions to the article.

Ambar Boodhoo, Venkat Maddila, Ben Hoban and Harish Kumar also contributed to this article.