Is the overall profitability of your business so-so, or rather unexciting? If so, here is some great news. Hidden inside it is the beginnings of something much better. It follows inevitably from the definition of “average” – of the things that make up an average, some are much better than that average. The question is, how do you find them? It needs a bit of ingenuity and the answer is slightly different in each case but one thing is always true; it doesn’t come out of your standard reporting.
Let me illustrate with an example. I was asked by a European engineering group to take a look at one of their subsidiaries. It was struggling, and they had more or less decided to close it down. The local management had explained the problem by saying “you just can’t get decent prices here. Our competitors use this country as a dumping ground for their surplus product.” But I didn’t accept that explanation – it sounded too easy, too general.
There had to be some part of the business which was capable of doing well. But where was it? I tried looking at different product groups; was there one which did much better than the others? No, they all looked much the same. No help there.
Was it different customers? Again, not much help. They all looked much the same in terms of gross profit (revenues less cost of goods sold). I had got to the limit of was what was available from the existing management information, and not found anything that could separate the gold from the dross.
But, there is more to the cost of serving a customer than the cost of the goods they buy. There is the cost of having a sales rep call on them, and the cost of processing the orders that result. Nobody had any idea what either of these costs were, but it wasn’t too difficult to work them out. Once that was done, we could get the full picture of the profitability of all the different customers, and some very big differences leapt out. It cost €100 for a field sales rep to make a call, but many of the customers they called on didn’t order enough to cover the cost of the sales call. One customer placed a lot of business but did so in hundreds of small orders which didn’t even cover the cost of processing the order.
Now the path to growth was clear. Stop calling on customers who don’t buy enough to cover the cost of a sales call, and find some other more cost-effective way of serving them. Use the time freed up for the sales force to grow the profitable accounts and find more new customers like them.There are two principles. The first is that an average tells you nothing, other than that there are some parts which are much better than average. The second is that your standard reporting tells you nothing about how to find that great business which is hidden inside your existing business. Remember these two and you can move from improvement to transformation.