Operating leverage represents the financial essence of a “trade-on”. That is, achieving both growth and efficiency. The more the business grows, the lower the share of AI asset depreciation becomes, and profit margins improve exponentially. This shift to a non-linear revenue structure is the goal of dynamic balance sheet restructuring.
Increasing operating leverage means accepting the risk of profit deterioration (volatility) during periods of revenue decline. The textbook financial response to uncertainty is to reduce the break-even point by making costs more variable, such as through outsourcing.
However, in Japan, where the labor supply is shrinking and labor costs continue to rise, continuing to rely on personnel is precisely what could be a medium- to long-term management risk. Labor costs are an “inflationary asset” that will continue to rise. Meanwhile, AI and computing costs are a “deflationary asset” that will continue to reduce in cost relative to performance. The shift is to change inflationary variable costs (personnel) to deflationary fixed costs (AI). Generally, changing to fixed costs tends to be seen as a risk, but it is actually a rational strategy during periods of inflation. Shifting the cost structure to company-owned assets that are less affected by external factors like rising wages is what will minimize volatility and act as true governance to ensure management stability.
In an age of population decline, labor will become an extremely rare resource. Restricting your valuable staff to processing tasks that could be done by AI is a managerial loss. The role of personnel in an AI transformation will be redefined in the following two ways.
- AI supervisor: Staff who audit and correct AI output and are responsible for new routine work to ensure quality
- High-touch: Customer-facing and field operations which add value because human presence and interaction cannot be replicated by AI
While AI assets with a near-zero marginal cost ensure efficiency at scale, people create value in uniquely human areas involving qualitative and interpersonal work. This redesigning of the division of roles is an inevitable strategy to survive this age of labor shortages.
As we have explored so far, an AI transformation is not just a case of deploying tools. An AI transformation is a fundamental shift of the company’s management operating system (core foundation) from a labor-intensive profit/loss mindset to an asset-based balance sheet mindset. Its success no longer rests solely with the CIO or CTO. It lies with the CFO and CHRO, who govern the flows of people and capital. The topic of discussion in management meetings should not be ‘how can we cut work hours’. Neither is it approving a perfect roadmap drawn up by an outside consultant. What should truly be up for discussion are three questions: ‘What percentage of the company’s resources can the CFO reclassify from costs through efficiency dividends and gain sharing?’ ‘Which assets will they be converted to?’ and ‘How will they contribute to improving the PBR (operating leverage)?’
An AI transformation is a structural shift process to restructure the rigid balance sheets at Japanese companies. The key to its success and whether engineers’ innovations are turned into financial assets ultimately depends on the CFO’s leadership and decisions.
ABeam Consulting will continue to seek to help clients accelerate value creation by leveraging AI and achieve speedy and reliable business transformation through the provision of consulting services aligned to each individual company’s goals and stages of development.
