the Rise and fall of Sabine’s Schnitzel Empire
My friend Sabine runs a chain of Schnitzel Stores.
In fact, it’s a little more impressive than that.
She runs Sabine’s Schnitzels - a business empire that manufactures, distributes and retails Schnitzels through a vertically integrated supply-chain business model.
They're a household name. At least in some households.
Chances are, if you've eaten a Schnitzel, it's one of Sabine's.
Around 7 years ago, Sabine invested in the very latest Schnitzel manufacturing technology.
Sabine spent €20 Million Euros implementing equipment that can ingest the unwanted remnants of pigs from the local abattoir (details below) - and the stale unused bread from the local baker (details below) and churn out 100 perfectly formed schnitzels per minute.
When they implemented this new equipment 7 years ago, it was the very latest in Schnitzel technology, and very much the envy of their competitors.
But Sabine called me recently with a meaty problem...
Schnitzel Tech, the company who sold her the equipment, has some new kit which claims to revolutionise Schnitzel production through something called Schnitzel-as-a-Service.
Their new system is faster, has a better user interface and can leverage AI to produce more Schnitzels per minute and reduce offal waste. Plus, Schnitzel Tech also promises reduced energy consumption - a big deal given the global climate emergency.
Sabine’s existing Enterprise Schnitzel System (ESS) cost €20m to buy and a further €4.6m per year in maintenance. Although Sabine still has to employ a large team of engineers to maintain ESS because there was a mix up around what maintenance actually means, and a total lack of letter A's on something called a RACI.
Florian, Sabine’s CFO was annoyed to find out that they also had to pay maintenance while ESS was being installed at their manufacturing site - which took 18 months (6 months longer than Schnitzel Tech promised) meaning they were paying maintenance before the first Schnitzel slithered off the production line.
Florian depreciated ESS over 5 years, which was conservative as it was expected to have a 10-12 year lifespan. So this upgrade to "Schnitzel-as-a-Service" has really blindsided him as it makes his Opex costs higher - which impacts his P&L in a tough economy.
Luckily, the sales team from Schnitzel Tech have made Florian and Sabine a tempting year end offer, and have even included their own handy business-case to save Florian time doing his own calculations based on facts.
If they choose to hand back the right to use ESS to Schnitzel Tech, they will get an upgrade from ESS to Schnitzel-as-a-Service. This will involve leaving most of ESS in place and changing over a few parts to make it work in the new, improved way. Sabine isn’t to worry about the details of this - it’s a simple changeover with near zero downtime to Schnitzel production.
Nobody will even notice the difference.
Plus, they don't actually have to implement Schnitzel-as-a-Service yet anyway - they can just pretend they have and still get the new pricing model. AJ, the 54 year old millennial sales guy from Schnitzel Tech joked that he could then claim the recurring revenue on their new commission scheme without Sabine doing a single thing.
"I can even claim the recurring revenue on our new commission scheme and you don't have to do a single thing Sabine."
What’s more, Sabine will no longer have to pay maintenance fees as these will be included in the handy annual subscription cost of Schnitzel-as-a-Service. This new fee will be cheaper than previous purchases so it’s a no brainer for Florian.
"Cheaper, faster, better - cool eh Florian?"
Despite Sabine's Schnitzel manufacturing now being as-a-service, Sabine still needs to keep some of her maintenance engineers on the payroll as Schnitzel Tech only provides some of the services within the ‘as-a-service’ model. This is all handily documented in 36 page PDF with 1,600 line items that says who will do what in the new world.
Anyway, when Sabine called recently, she just wanted me to run my eyes over the agreement for a second opinion as Schnitzel Tech have told her that this is a once in a lifetime offer - and won’t be offered again.
Its Quarter End so there's a deal to be done.
Until December next year.
But, as you probably know - in the Schnitzel world, the devil is usually in the details.
Here’s the pretend email I sent to to make-believe Sabine....
Subject: WTS - What The Schnitzel?
I’ve reviewed the information you sent to me and have one big worry.
You’ve paid €20m 7 years ago for something that works really well and still has 7-10 years more life left in it. Schnitzel Tech's new offering doesn’t seem to add any real business value - and may even disrupt your operations.
I worry that this could really damage Sabine’s Schnitzels. What if it doesn’t work as expected? What if it’s slower, or less reliable? What if it produces badly shaped Schnitzels?
I read the agreement and it seems that if you ever want to go back to your current ESS equipment in the future from Schnitzel-as-a-Service, you’ll have to buy ESS all over again for the full capital value. Even through you've already paid for it once.
I’m not sure that Florian has factored this into his business case?
There’s a real risk that you could wind up paying for ESS twice, punctuated by a few years of disruption running on Schnitzel-as-a-Service. Which is new and unproven.
Are you sure the Schnitzel Tech guys aren’t just pushing this because the ‘as-a-service’ revenue will be better for their share price, and AJ's sales team commission?
Don't forget that as-a-service revenues are much more valuable the stock market than old-fashioned up-front purchases.
I received this reply:
Subject: Re: WTS - What The Schnitzel?
Thanks for this information, I will let Florian know.
I don’t think he’d factored in the risk of buying something we have already depreciated all over again if Schnitzel-as-a-Service doesn’t work out. It does sound quite risky and more aligned to Schnitzel Tech's agenda than ours.
By the way, we also have a challenge with our IT systems...
Have you heard of something called RISE with SAP?
Totally unrelated to this post, but if you know anyone who has had a RISE offer from SAP and you'd like to sort out the meat from the chaff, drop me a line.