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What essential elements does a company’s top management team need to put in place to create years of strong, profitable growth?
Here’s my old family recipe: information, process and value footprint.
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These cornerstones formed the basis for a two-month series of workshops that I recently conducted with my colleague, Lisa Dolin, for the top 150 managers of an extremely effective global company.
All three elements are important and essential; without any of the three, the company will not reach its potential.
I’ll cover the three over the next week on this blog. The first is Information.
A company’s core profitability information is contained in a profit map. I describe profit mapping in my award-winning book, Islands of Profit in a Sea of Red Ink. In essence, a profit map is built by developing a full P&L (including overheads) for every invoice line. Once this is accomplished, the profit map answers the critical question: What is the actual profitability of every product in every account?
It also answers a multitude of other critical questions about product and supplier profitability, as well as highly focused questions like: Are my low-volume unprofitable products largely consumed by my low-volume unprofitable customers (guess the answer…)?
Here are some important tips in developing and using profit maps:
Invoice-line information. Developing fully-costed information on every invoice line is absolutely essential. All too often, managers starting on the road to understanding and managing profitability focus on customers, with a rough invoice-level (as opposed to an invoice-line level) costing usually based on sales volume. These efforts give an inaccurate and incomplete picture. Even in your biggest, most obviously profitable customers, over 20 percent to 30 percent of the products are unprofitable by any measure – and withoutinvoice line costing, this is completely hidden. Also, critically important opportunities to work with suppliers are undiscovered.
Strategy first. One of the biggest surprises in profit mapping is how obvious the strategic opportunities and problems are. Many managers start the process with the assumption that they will focus on tactical issues like pricing and whether to take certain business. As soon as they see a profit map, they are struck by the fact that big portions of similar business are either very profitable, or very unprofitable. Immediately, they see what the company needs to do for really big improvements that put really big new profits on the table. Only later do they turn to the more tactical opportunities that need systematic grassroots mining.
Big opportunities early. Here’s what almost always happens when you give a profit map to a sales rep without guidance or training: He or she goes after small changes in small accounts (e.g. getting the customer to order three rather than five times per week), declares victory and goes back to business as usual.
Instead, it is most productive to focus first on the big profitable customers, where you have the best relationships, the highest volume, and most often where you have a 20 percent to 30 percent fast profit upside.
To repeat: Focus first on your big, profitable customers – your islands of profit – both because they offer the largest, fastest profit gains, and because securing these critical accounts is the absolute most important way to protect your business from fatal profit erosion.
After that, look at the large, low-profit customers. These are more difficult to change because they often are unprofitable due to unfavorable pricing or contractual obligations. These take time to change. The lesson: If you really understand your profit map, your true net profit landscape, you can ensure that your customer relationships are profitable from the start.
Don’t forget your products and suppliers. Most companies have as much, or more, upside opportunities on the product and supplier sides of their business, yet most instinctively focus on their customers. With profit mapping, you can see which customers are buying which products, and it is not at all unusual for over 50 percent of a company’s products to be unprofitable (and often purchased by unprofitable small accounts).
Keep it simple. Ultimately, your profit information will be used by lower-level sales reps, supplier managers, and others. These individuals almost always do best with relatively simple formats and standard ways of analyzing and acting on the information. The lesson: Don’t design the information for a highly quantitative analyst who loves to explore data. Instead, design the right tool for the job.
In my next blog post, I’ll look closely at the second cornerstone, Process.
Jonathan Byrnes is a senior lecturer at MIT and author of the recent book, Islands of Profit in a Sea of Red Ink. He is president of Jonathan Byrnes & Co., a consulting company with which he has advised over 50 major companies, medical institutions and industry associations. Contact him at firstname.lastname@example.org.