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Listening to the Voice of the Customer

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Strategy is a hard thing to define.  People often ask me what we do as strategy consultants.  A simple, but unsatisfying, answer is that we help companies figure out what to do to create value.  But that’s not especially elucidating, either.  How do we help them determine what to do?

Among other things, we talk—and listen—to customers.  We have delivered valuable, actionable insights to clients by doing voice-of-the-customer (“VOC”) research.

For example, consider one of our clients, which had dutifully built its products largely on the basis of customer feedback.  We recently interviewed a cross section of their current and potential customers.  Our client was started to find a large difference between what customers and non-customers valued.  They hadn’t realized that, by designing their product to be desirable to current customers they had ended up with a product suited only to one segment of the overall market.  They are now designing a refresh that should allow them to reach a much larger effective market.

Here’s another example of how voice-of-the-customer research can create value.  A few years ago, we were interviewing channel partners for a consumer products company.  Asking about the relative importance of various product attributes, we kept hearing about the importance of one particular attribute that our client was not even aware of.  After reviewing our findings, our client decided to make performance on this attribute a key part of its product development and marketing investments.  This client has gone on to become one of the largest and most successful companies in its industry.

It’s surprising to me the number of companies that try to make big, strategic decisions without having a crystal clear understanding of what buyers value, what they are struggling with, or how competitors are addressing their problems.  This is where VOC research can really add value.

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Infrastructure Update: What Investors Need to Know about the Trump Infrastructure Plan

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President Trump addresses a joint session of Congress on Tuesday night and is expected to present further details on his infrastructure plan.

During the previous month, we have spoken to senior Republican and Democratic staffers on the House and Senate committees with jurisdiction over infrastructure and most indicated that the Administration, rather than Congressional leadership, will take the lead in advancing an infrastructure investment package.

As a reminder, the preliminary version of the Trump Infrastructure Plan proposed an 82% tax credit on the equity investment in an infrastructure project.  The plan assumed a 5:1 ratio of debt to equity, which implies an overall 14% tax credit on the project’s cost.  We summarized the plan and its prospects in Congress a few weeks ago.

If implemented as written, the Trump Plan would upend the landscape of infrastructure investing.  In this post, we discuss several of the more nuanced implications of the plan for infrastructure investors.  In summary:

  • The Trump Plan would make equity cheaper than debt and theoretically incentivize all-equity financing.
  • It is likely any implementation of the plan will limit the basis for the credit to prevent the possibility of all-equity financing as well as to prevent a massive hit to the federal budget.
  • For investors without enough taxable income to use the credit, tax equity partners will be required. However, as written the plan may require tax equity to provide more than 81% of equity, something few tax equity investors are likely to be willing to do.

This is the second issue of a new Woodlawn series about infrastructure investment, combining our expertise in energy infrastructure, federal policy, and tax equity.

We will be providing regular updates on the various infrastructure investment proposals under consideration in Washington, DC, focusing on how they would work, where they stand in Congress and the Trump Administration, and what they would mean for private investors.

If you would like to continue receiving these updates, click here.

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Infrastructure Update: An Introduction to the Trump Infrastructure Plan

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During his campaign, Donald Trump promised $1 trillion in new infrastructure investment and proposed to finance it through public-private partnerships and a new federal tax credit.  Since taking office, President Trump has continued to support an infrastructure investment package.

Should legislation reach President Trump’s desk, the consequences for infrastructure investors will be significant.  What do we know so far?

  • Democrats and Republicans agree on the need for significant new infrastructure investment, but disagree on how to finance that investment. Broadly, Republicans prefer public-private partnerships and tax credits; Democrats prefer direct expenditures.
  • The Trump infrastructure plan provides for a new 82 percent tax credit on the equity investment in a project. Assuming, as the plan does, a 5:1 debt-to-equity ratio, the credit will be worth 14 percent of a project’s cost.
  • Statements from President Trump as well as leaked documentation tied to the Administration suggest a focus on transportation infrastructure, with rail projects emerging as a surprising priority.
  • Legislative action is not imminent. Congress may seek to attach an infrastructure bill to legislation concerning foreign earnings repatriation or tax reform.  Neither of those are easy lifts and will take time to work their way through Congress.
  • If the Trump Plan is enacted into law, infrastructure investors should be prepared to monetize the new tax credit either through their own tax appetites or by securing tax equity.

This is the first issue of a new Woodlawn series about infrastructure investment, combining our expertise in tax equity, federal policy, and energy infrastructure.

We will be providing regular updates on the various infrastructure investment proposals under consideration in Washington, DC, focusing on how they would work, where they stand in Congress and the Trump Administration, and what they would mean for private investors.

If you would like to sign up to continue receiving these updates, click here.

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Tax Equity 201: Partnership Flips in Detail

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Our primer on tax equity investments (Tax Equity 101: Structures) explains that renewable energy project developers often use structures such as the partnership flip, sale-leaseback, and inverted lease to monetize the federal tax benefits for such assets.

Here, we dive deeper into the actual mechanics of and accounting for partnership flips. As we will see, the structure has several built-in inefficiencies relative to a single owner that can monetize all of the tax benefits internally. This is not an indication the structure is undesirable, but an acknowledgement of the imperfections in what is often the best available alternative for an owner without its own tax liability. [Read more…]

Tax Equity 101: Structures

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This post was updated on February 9, 2017. The original version was published in March 2013.

The three main pillars of competitiveness in the solar industry are the ability to acquire customers at low cost, install inexpensively, and achieve low cost of capital.  To realize a low cost of capital, solar developers must often partner with so-called “tax equity” investors due to the structure of federal solar incentives.  This paper summarizes the main financial arrangements used for such financing: sale-leasebacks, partnership flips, and inverted leases (which are also called lease pass-throughs).

The examples in the paper are from solar, but many of the same principles apply to the wind industry as well.

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