The Myth of Profitability Turnarounds

The myth that surrounds profitability turnarounds usually involves a savior riding into a company and slashing headcount and inventory and cutting costs in the areas that remain, according to Jonathan Byrnes, author of Islands of Profit in a Sea of Red Ink and senior lecturer at MIT. Byrnes was speaking at the Waypoint Analytics-sponsored Advanced Profit Management Conference last week in Phoenix, AZ.

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"To me, that is evidence of a company that was, is and will be terribly managed," Byrnes said. He said a company that approaches profitability improvement by slashing costs alone can expect to have to go through the same process again in four to five years.

In reality, a profitability turnaround doesn't have to be difficult. It's more like "getting healthy," he said, eating good food, avoiding beer and going to a health club. Over time, you start to see positive results. "It's not painful," he said. "It's easy." Instead a turnaround can generate cash from the start by aligning your service model with the needs of different customer segments.

And results can come quickly. But the effort requires a systematic pathway to success.

Byrnes said that a sustainable profitability turnaround requires four key elements:

• The right information: By profit mapping, as outlined in his book, distributors can gain a better understanding of the costs associated with serving each customer. Read about profit mapping in this interview with MDM.
• The right priorities: By focusing on your highest-profit business and finding more business that fits that core, distributors can start to see profitability improvements and revenue growth right away. He also said distributors should focus on turning around marginal accounts and repricing what's left.
• The right processes: All departments should be on the same page, and the company should standardize its service model. Read more about this in Building Blocks to a Profitability Mindset.
• The right compensation: This idea focuses on aligning sales with profitability and re-examining your compensation model.

Of course leadership is the key to success in any sort of profitability turnaround effort.

Byrnes book, Islands of Profit in a Sea of Red Ink, is available through leading retailers. Learn more at Byrnes' website: http://islandsofprofitbook.com/the_book/