How Digital Is Your Company?

How do you get your customers to finance your growth?

If there is one corporate function that would be voted "least likely to go digital," it would be finance. In most companies, finance is the oldest, stodgiest, most conservative department. There's a good reason why chief financial officers and their minions are known as "bean counters." But today the companies that are going digital are leading with finance. In radical fashion, these companies are essentially letting their customers finance their growth -- and multiply their stock price. In the process, they are forging whole new concepts in corporate finance: negative working capital and negative asset intensity. Each of these ideas overturns the conventional laws of corporate finance -- and neither would be possible without the digital revolution.

The old model of corporate finance took for granted three time-honored operating principles. First and foremost, companies must raise capital for physical assets. Second, companies could only operate with a reasonable stock of inventory -- components and parts, works in process, and finished but unsold goods. Third, companies need to raise large amounts of working capital to operate and grow. In fact, according to the old laws of finance, the faster companies have grown, the more they have needed working capital.

Doing business digitally absolutely junks those operating principles -- and reinvents the role of the CFO and the finance department. Digital finance lets you shrink asset intensity without any loss of control or quality. Outsourcing assets to suppliers shifts inventory from your books to theirs. The results: lower operating costs, a higher asset utilization, fewer assets required for every dollar of sales, and, ultimately, negative working capital.

Look at the leading company in almost any industry, and you'll find the same pattern of asset disassociation: Marriott sells its hotels -- and opts for management contracts. Chrysler rids itself of component plants -- and increases its sourcing from suppliers. Disney sets up EuroDisney -- and owns the management contract, not the tangible asset. In each case, the company that releases tangible assets does so without sacrificing operational control -- thanks to the digitization of information.

Chrysler, for example, has shifted the responsibility for the asset to its suppliers and now relies on electronic-data interchange to access real-time information about the quality, delivery, and even the redesign of parts and components. Marriott and Disney have given up assets but have retained contractual rights to digital information -- such as how many customers they have in a given time period, how much each customer spends, what each customer establishes as a utilization pattern.

In fact, digitization lets you accomplish two important goals with respect to assets. First, it lets you assign your company's assets to wherever they can best be managed -- which frequently is with your suppliers. Second, "going digital" lets you substitute good information for excess assets. In the old model, redundant assets of all types -- inventory, manufacturing capacity, even accounts receivable -- were simply every company's way of compensating for poor information. The first breakthrough of digital finance: It improves the management of assets and eliminates waste from the system.

The second breakthrough of digital finance is the invention of negative working capital. The preeminent example of a company that is pioneering digital finance is Dell Computer Corp. By now, most businesspeople are familiar with the rough outlines of the Dell story: the tale of how Michael Dell started the company in 1983, selling computers out of his dormitory room at the University of Texas; how the company has since ridden its business model -- direct-to-the-customer selling -- to become a $12 billion business, with profits of nearly $1 billion.

Less well known but just as important are the details of Dell's digital design. The company prefers to do business over the Web, and it currently registers $10 million in revenue a day over its Web site -- more than $3.5 billion per year. And by the end of the year 2000, Dell hopes to generate 50% of its sales online.

Dell's digital business design allows the company to rewrite the rules of asset ownership and management. Rather than having an inventory of products in stock for shipment to resellers, Dell typically assembles and ships each computer within five days of a customer's placing an order.

The company buys off-the-shelf components -- motherboards, processors, software -- on a just-in-time basis and stores them by the truckload within 50 feet of its assembly line. With only one week of parts on hand, Dell turns its inventory 52 times per year -- a big advantage over both Compaq and IBM, which turn their inventories 13.5 and 9.8 times per year, respectively.