DTC’s Shine Eyes Return To “Human” Intervention in Computerized Rough Allocation Process – Reveals Details of Modified SoC Strategy

The place and time: This past Tuesday night at 10:00 pm, the El Al lounge at Heathrow Airport, London.

The people: a handful of diamond industry earthlings, plus yours truly, who either were not privileged to attend that evening’s annual DTC dinner with clients or who, for other reasons, chose not to go.

The activity: receiving “live” cell phone reports on the actual tidings emanating from the dinner. On the flight back to Israel, some slept while others analyzed.

During that evening, DTC Managing Director Varda Shine, unquestionably the star of the event, placed her personal stamp on the DTC marketing system. She is now changing the system she inherited when assuming the DTC helm. The changes are not cosmetic – they are real, they are substantial, and they make sense. The following is one line that will sum up the changes about to take place: the marketing will be more focused; the goods will go to manufacturers; human “intervention” will again play a role in the over-computerized allocation system; and the DTC will reduce its “macro-management” of its clients’ business. There is one other line that repeatedly came up when discussing the imminent changes and it cannot be dismissed as merely saying the right thing at the right time: a commitment to the highest ethical business practice and the need for both the DTC and its clients to “stand-up and be counted.”

The DTC public relations spin masters wrote a lovely press release with inspiring platitudes describing the “innovation for the 2008 Supplier of Choice contract period,” but you either had to be at the dinner or on a cell phone to appreciate the essence of the messages. Sufficiently detailed and overt, the messages help one realize that the changes are real and not imaginary. By being explicit, Varda has locked-in and committed the organization in an unequivocal manner. That was needed, as nothing kills the business more effectively than uncertainties regarding rough supply policies.

De Beers Managing Director Gareth Penny also spoke – but he largely (albeit concisely) repeated Varda’s message and underscored the commitment to ethical issues. By deferring to Varda, he transmitted his strong support for her, something that will definitely put to rest questions that some guests had on their minds.

Chairman Nicky Oppenheimer was Varda’s co-star of the evening. During the event, rumors again circulated as to whether he had lost his interest in diamonds and was basically “a potential seller.” However, Nicky put the rumors to rest once he astutely stated that his grandfather and father were in the diamond business, and that he is there to stay. He also expressed the hope that his son and grandchildren will be in diamonds as well. So whatever decisions Anglo may make about the Oppenheimers’ management contract in 2008 (a one-year termination notice can be given on the seventh anniversary of the De Beers’ privatization deal), Nicky will stay – ensuring that the Oppenheimer magic will remain part of the brand.

The Essence of SoC 2:

Let’s summarize the specific changes Varda announced by looking at the points she covered at the dinner:

1. Manufacturing Focus. The DTC will refocus on supplying rough to diamond manufacturers. It’s like going back to the initial promise of Supplier of Choice (SoC), which was never really implemented, as de facto Sightholders have become traders in boxes.
2. Application to Bands of Core Goods. In order to achieve that focus, every manufacturer will have to clearly identify his core business and core needs. His applications for rough can only be in the bands of goods that contain his core articles; this is extremely significant and a dramatic change with the current practice. Today, you can be a DTC client in New York who needs large goods, but decides to apply for certain Indian boxes because the profitability is higher there. A high ranking will secure a good “hit rate,” a strategy that DTC executives refer to as “gaming.” Varda seems to be determined to minimize gaming and sell the goods to those who can cut them and polish them. Limiting applications to certain bands is an effective way to achieve the objective.
3.  Macro-Management of Client’s Business. The DTC will phase out the macro-management of the clients’ business and not insist on conforming to a certain strategic template. The De Beers press release talks about a “cooperative partnership with clients” and the “sharing of responsibilities.” The custodian role may have been dead for a while, but Varda – playing safe – buried it again. The view that there is one template that fits all was an unintended consequence of having an allocation scorecard that tended to stifle individual entrepreneurship and induced Sightholders to conform to whatever it is that will give them more scoring points. (Having a few clients, for example, in a number of markets has led to a “downgrade” because of lack of geographic focus, instead of getting credit for development of new markets.) Until now, one scored points for downstream involvement with retailers, which was considered preferable to selling horizontally on a B2B level. Not anymore. Varda’s message was clear: “We want you to sell polished in an efficient way and you must show that you add value to the products. To whom you sell is your own business. Do it efficiently and add value.” The press release actually made this point nicely: do what you do best “regardless of where [you] operate in the diamond pipeline and regardless of [your] business model.” This is a major change – for the better.
4. Neutralizing Profile Padding. When Sightholders and the DTC suspected that some clients were padding (also called “creative accounting”) the financial performance data, the DTC responded by spending millions on Kroll forensic auditors to make them uncover the lies in the profiles. Some Sightholders reported highly inflated volumes, exaggerated profits, artificially created equity, and impressive equity-to-debt ratios supporting claims of high returns on capital. Instead of continuing to play detective, to discover the “truth” Varda is now simply reducing the weight of the financials in the scoring process. She wants her clients to show the DTC that they have the financial resources needed to purchase the boxes and to adequately sustain their own business activities. The need for creative accounting and transfer-pricing gimmicks in order to get higher scores is falling away. By reducing the relative weight of financials on the allocation process, Varda enhances transparency and corporate governance. (It also solved her dilemma of what to do with companies Kroll had identified as being problematic.) It is amazing how much can be achieved by simply viewing the financial situation as a pass/fail item rather than focusing on the points.
5. Human Beings Come Back in the Decision Making Process. The DTC will no longer hide behind computer-generated decisions. (There is not a single client that understands the 16-stage Performance Allocations Model that is part of the SOC Application Valuations and Assessment Model. The first computer program decides how much you get of what; the other program decides whether you become and stay a Sightholder and determines your priority.) Though in SoC 2 the computer-allocation models will still be rather central, the input and output will be subject to human intervention, human interpretation, and human decision making. The human intervention will be mostly based on more extensive business review meetings (BRM’s) with clients. This is good news. It is actually very good news, but it also puts greater pressure and responsibilities on both the professionalism and the integrity of the human beings involved.
6. One-Year ITOs. For the life of the three-year contract, the ITOs (intentions to offer) will be for one year ahead instead of only a half year. This enables much better long-term planning for manufacturers and facilitates their entering into long-term commitments with polished clients. One-year ITOs really provide the continuity and the certainty that the DTC wants to provide to its clients; this is a great innovation and will differentiate the DTC from other suppliers.
7. Consultative Process. In preparation of the new contracts (i.e. SoC 2), Varda wants to engage in a consultative process with clients. Working groups will be convened in all the centers, which will facilitate getting client feedback on how they believe SoC 2 should look. This idea is both desired and commendable. (It also should assist “the Bainies” (the Baine and Co. consultants) whom the DTC got back in to modify the initial SoC, which the consultants designed.)

Of course, an annual DTC dinner like this also provided an opportunity for cheerleading and rallying behind the flag (brand), to intensify faith in the future, to motivate, boost morale and to instill assurance in the system. Much was said about transparency, social responsibility, trust, and especially in having confidence that, in the long term, diamonds are a better business than real estate and stock markets. Interestingly, all Sightholders at the dinner became instant believers because the DTC January sight boxes returned to high one-digit or low two-digit premiums. Nothing warms the heart of a client more than profit in his box.

SoC 2 marks the beginning of the successful transition process between the past and the future. Varda well done!

Have a nice weekend.