Global Productivity Rankings Announced
NetApp, the multinational storage and data management company, was ranked number one overall for Financial Cycle Time: the time it takes for a company to generate its operating profit margin. The Global Productivity ranking was devised by Duke Corporate Education faculty member Joe Perfetti and his colleague Michael Cichello.
Financial Cycle Time (FCT) measures how long it takes a company to generate its operating profit margin. “In a nutshell, FCT measures the average time it takes to turn a dollar of investment into a dollar of sales,” said Perfetti. “It measures the productivity and efficiency of the organization and can be a key indicator of stock performance.”
The average financial cycle time for the technology hardware and storage industry is 77.2 days. NetApp’s time comes in at -124.9 days.
The following is a list of the global top 10.
Winners across other industries are as follows:
According to Perfetti, Net App’s Q3 2017 Earnings Call provides some rationale on how the company was able to outpace its software peers and 1,000 of the world’s largest companies in financial productivity. George Kurian, Chief Executive Officer and President, highlighted a few important determinants of superior Financial Cycle Time:
- NetApp’s overall strategic priority is driving financial performance through activities like continued investment in innovation, lowering its cost structure, streamlining operations, and a plan for more efficient use of capital.
- The growth in NetApp’s All Flash Array Business continues to outpace both the market and its competition, growing 160% year-over-year to an annualized net revenue run rate of almost $1.4B.
Perfetti notes that NetApp’s 2016 Annual Report provides further insights.
“The company was able to streamline its manufacturing value chain to minimize capital investments while creating flexibility for rapid expansion,” he said. “Manufacturing operations like materials procurement, commodity management, component engineering, product assembly, quality control, and global logistics have been outsourced to over 10 global locations. While NetApp has a robust R&D function to develop its own products, it reduces direct R&D spend through technology acquisition strategies like business combinations and third-party licensing.”
NetApp’s enhanced productivity has not gone unnoticed by analysts. A UBS equity analyst report of NetApp’s 2017 Financial Analyst Day highlighted the efficiency activities at the company: faster product roll-outs were achieved by moving to fewer hardware designs and by using less custom hardware. By moving from a traditional and time-consuming model of software development to a leaner and more agile approach, NetApp has been able to reduce its product development by two-thirds.
The FCT tool is a simple yet powerful way to measure productivity, find and address gaps in processes, and deliver return on investment that has real financial impact. Companies that reap higher margins faster rise to the top of the ranking.
Financial Cycle Time is calculated by first dividing total invested capital by annual revenue, which tells you the percentage of a year that you are tying up capital. Then, multiplying by 365 translates the metric into days. The result tells you how often, on average, it takes a firm to turn invested capital into revenue.
Note that a negative number of days are achieved when companies are receiving payments before service or products are delivered. For example, a company like Netflix receives subscription fees from customers in advance, which can be used to fund acquisition of licensing rights and creation of original content.
Mike Canning, Duke CE’s Global Head of New Businesses, finds that “the leaders we work with are always looking for new insight that they can translate into better performance. In a world where speed counts and disruption is becoming the norm, FCT can be a source of competitive advantage and therefore an important method for businesses to understand, measure and manage.”
The Financial Cycle Time tool is a trademark of Percipient Partners LLP and the brainchild of Joe Perfetti, Duke Corporate Education faculty, a lecturer at the University of Maryland, College Park and adjunct professor of law at Georgetown University and Michael Cichello, a finance professor at the McDonough School of Business at Georgetown University.
Learn more about Professor Joe Perfetti and his online Demystifying Finance course offered by Duke Corporate Education.