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The Strategy Theme
(Anthony Frausto-Robledo) So let’s talk about the overall group strategy, and you had a strategic officer before in Sean Flaherty. It seems that without a single point of responsibility for overall group strategy that strategy for the Group is now going to be a “team effort.” Is that correct?
Yes, absolutely. I don’t want to be too theoretical but take the average scorecard approach—you Americans founded it—and it is exactly that what we believe that we have with several division strategies, moving to an umbrella brand strategy—meaning the Nemetschek Group strategy. So everyone is responsible for their segment or division strategy and all combined will account for the Nemetschek Group strategy. Most likely myself, as an interface, will take part in each division strategy, because there always needs to be a financial link as well.
How often will the division leaders meet? For example, Jon Elliott is in Pasadena, will he come to Germany regularly?
We take travel seriously, so sometimes it is very good to meet in person. However, living in a digital world with time differences we can use virtual means to attend meetings. However, we usually meet four times a year in person, and that will be in Germany.
So why is it that Viktor and Koen are full-time division heads while Jon Elliott is not?
Yes, that’s a little bit tricky, and I would even correct you a bit because it is difficult to say everything in a press release. It is only Viktor and myself being full-time, and I’ll tell you why. Koen and Jon are really focusing on the main brands of their segments. Take for example Jon, in the Build segment. There is no surprise and no secret that Bluebeam represents 80 percent of the revenues in the Build segment. Due to Jon’s notable accomplishments at Bluebeam, he has been promoted to the Executive Board, and this has been publicly advertised. However, he will be devoting 80 percent of his time to his CEO role to continue Bluebeam’s success, and then 20 percent of his time to the other two brands in the Build segment.
What we tell the capital market is that the highest probability for further M&A activities is really in the Build and Operate segment, and I would say a bit higher actually in the latter segment because the opportunities are just higher.
Also, Koen is a bit similar. While he is no longer the operational CEO of Spacewell, he remains the strategic CEO and remains focused on its expansion along with the Operate segment. So both of them are 80 percent on their leading brands that mainstay their segments—Jon for Bluebeam and Koen for Spacewell—and they define the strategy around their segments.
In the case of Viktor—and you know that the majority of our brands are in the Design segment, we have ten out of 16 brands in this segment—and thus this warrants Viktor’s full attention and a full-time position. So it is myself and Viktor in the full-time roles and Jon and Koen in the part-time roles constituting the Executive Board.
Is there a sense now with the new divisional structure, and the clarity that it brings and how it communicates to the capital market, that it signals where your future acquisitions may be lining up?
Yes, definitely. The focus in terms of M&A activity is really for all three of them. And it is my job to support them. Importantly, there is also a focus on both organic growth and nonorganic growth.
As for future acquisitions, it does depend a little bit on the segment. In our view, the highest probability rate for this activity to go further is in the Build and Manage segments, rather than the Design segment. In the Design segment, the focus is on sustaining and accelerating organic growth. But all of the segments are driven by revenue growth and I am the one enabling them because for both types of growth you need to have the financial funds. What we tell the capital market is that the highest probability for further M&A activities is really in the Build and Operate segment, and I would say a bit higher actually in the latter segment because the opportunities are just higher.
So this is also where the segments will fight in healthy natural competition, for the investment means of the Nemetschek Group for M&A activities. That too is something that the Supervisory Board wanted to achieve. It helps to drive revenue growth across both organic and nonorganic categories.
So when you talk about fighting in a healthy way between the brands, are you talking about how profits are reported back to Germany and how they fund investment in general and how those funds are ultimately parceled out between the brands?
Exactly. We are all together—myself and the three division heads—the Executive board. The executive board of a German stock listed company is responsible for the development of the company. So every one of us has an interest in the Group success, whether in his segment or other segments.
So how it works is at the end of November we have a budget week, and every brand CEO tells us about ideas for the upcoming period. So we had this at the end of November in 2018, and all of them had a nice investment case. And that’s a good message because if they did not have a good investment case, we would be disappointed. It would mean they do not have any ideas about how to grow further. So everybody is coming up with an investment case, and of course, we need to have arguments and KPIs to determine who is the more urgent investment case, which is the higher priority, and then prioritize and order them. We cannot do them all. If we did, I would not report a stable operative margin to the capital markets—these days around 25-27 percent.
For M&A activities we need to decide at the executive board level and then get a decision from the Supervisory Board, which approves every M&A transaction.
Intermission 2 — The German Mittelstand Model of Excellence
It is interesting to learn from Patrik that the Nemetschek Executive Board sees the brands in a form of healthy competition when it comes to financial investments. It also sees the brands as discreet highly-focused business entities that may, at times, overlap with each other in some form of competition, but principally offer alternative strengths across core market competencies. As has been written about here on Architosh before, Nemetschek’s organization is influenced by the German Mittelstand model, the model which has made Germany the world leader in centers of engineering excellence. Not to be taken too literally, but the Mittelstand model is fundamentally about doing one thing and being the best in the world at it. When looked at from this perspective, each brand can be compared to its competitors in the larger AEC software market on the metric of who is best in the world in “a core competency,” because in truth many brands do more than just one thing. Thus, “core competency” can exist as a sub-metric of evaluation within larger AEC technology trends—for example, “computational design.”