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Grow your Profit Core

Grow your Profit Core 1

By Jonathan Byrnes is a Senior Lecturer at MIT, and Founding Chairman of Profit Isle, John Wass is CEO of Profit Isle,

Even in today’s crisis, managers can create surprisingly large profit gains by growing their profit core – selectively increasing the profitability of their current book of business. This has enormous leverage.

In most companies, 10-15% of the customers generate 150-200% of the reported profits, while 15-20% of the customers erode 50% or more of these profits. The remaining 65-75% of the customers produce only minimal profits or losses. We call the high-profit customers “Profit Peaks”, the large low-profit customers “Profit Drains”, and the small minimal-profit customers “Profit Deserts”.

This profit segmentation is the key to growing your profit core because each segment needs a different growth game plan.

For example, if a typical company increases its Profit Peaks by 20%, and converts 20% of its Profit Drains to Profit Peaks, it will boost its net profits by over 50%. This affects only 10-15% percent of the customers.

Transaction-based profit metrics – creating an all-in P&L for every transaction line (invoice line) – are the key to profit segmentation. Today, prices and cost to serve vary widely from customer to customer, even for the same product. These metrics match each increment of revenue to the full cost of producing it. They show the profitability of literally every product purchased by every customer every time.

Financial metrics, like revenues, costs, and gross margins are aggregated; they show whether a company is making money, but not where it is making money. Transaction-based profit metrics show both whether and where a company is making and losing money – in every nook and cranny of a company’s internal profit landscape.

Armed with this understanding, managers can grow their profit core in two concurrent modes: tactical improvements and strategic improvements. Tactical improvements reflect your ongoing process of bringing your customers up to your own best practice, while strategic improvements produce major, long-run changes in your customer profitability and differentiation.

Managing your Profit Segments

Your Profit Peak customers are already very profitable. The key here is locking them in and growing them. For example, operating ties like vendor-managed inventory or joint category management often produce 30% or more increases in both revenues and profits, even in the highest-penetrated customers. These critical customers require a specialized multi-capability team dedicated to identifying these opportunities and managing the change.

Profit Drain customer are big money-losers. Most of the time, the cost of operations is the issue, not price. Transaction-based profit metrics enable you to produce an all-in P&L, which we call a “profit stack”, on each customer. When you line this up against the relevant best practice profit stack, it shows exactly which cost factor needs to be changed to reverse the profit drain. Often, this is easy to do, and is costless for both the customer and the vendor – like consolidating overly frequent orders – and it increases the profits for both parties. Profit Drains are important, problematic customers. They need a very different multi-capability team that is highly skilled in reversing profit drains, analogous to a bank problem-loan “workout team”.

Profit Desert customers are small but numerous. These customers require a very low cost to serve. You can accomplish this through measures like automated customer processes and highly standardized menu-based services. This segment needs yet another dedicated team of specialists, highly skilled and experienced in this process.

Tactical Profit Improvements

Imagine that you had a video of every transaction your company produced in a year. You could make a highlight “film” of your company’s best practice – the most profitable transactions. Transaction-based profit metrics allow you to do this. You can even see the specific factor – e.g. price, product mix, order pattern, sales channel/rep – which would bring each of your transactions up to your own best practice, and calculate the potential upside. These are tactical profit improvements.

Strategic Profit Improvements

Strategic improvements alter a company’s basic relationship with its customers. The profits that a company makes are determined by its customer value proposition and its cost to serve. Thus, a company can turbocharge its profits by systematically improving its customer value proposition (enabling it to capture a portion by raising its price) or lowering its cost to serve.

Tactical improvements enable a company to bring its deficient transactions up to its best practice standards. Strategic improvements, on the other hand, allow a company to improve its best practice. Here are some examples for each profit segment.

Profit Peaks

More value. Several years ago, GE made a quantum improvement to its customer value proposition in its aircraft engine business. In the past, the company sold engines, parts, and services separately. Its innovation was understanding that what the customers actually wanted was well-functioning aircraft power. In response, they packaged their capabilities and offered “power by the hour”, which was hours of well-functioning aircraft power.

This changed the strategic paradigm of the industry. GE differentiated itself by aligning directly with its customers’ needs. Most of its competitors were niche providers, and few could compete directly with GE’s comprehensive new offering. Profits soared.

Less cost. Adrian Enterprises, a disguised company that sells process flow control devices, had two main customer segments: university laboratories and suppliers to semiconductor fabs. The company’s sales reps favored the university laboratories because they had high gross margins, while the semiconductor supplier segment had low gross margins.

The company used transaction-based profit metrics to analyze its business. Its managers were surprised to find that the university laboratory segment actually had moderate profits, while the semiconductor supplier side was very profitable. The reason was that the university laboratory sales were very fragmented: every order was for a different experiment, and most required several hours of engineering support.

The semiconductor suppliers were completely different. Their products were input into standard processes, with predictable demand and no need for technical support. When the managers saw this, they increased sales to the semiconductor supplier segment. They also thought hard about the university laboratory segment, and realized that they could train a set of low-cost graduate students to be “product representatives” who could provide the technical support the researchers needed, and even serve free pizza. Profits flowed.

Profit Drains

More value. Nalco had two problems: the company sold commodity chemicals for water treatment systems, and its customers were geographically scattered. Competitive pressures kept prices low, and the company was plagued with unpredictable orders with costly deliveries. In order to lower its delivery costs, Nalco installed in its customers’ chemical tanks wireless sensors that it could monitor. This allowed the company to supply product when tanks ran low instead of reacting to customer orders. This reduced cost. Soon, the company realized that it could use this information to schedule its production. Costs plummeted.

In conversations with customers, Nalco’s engineers figured out that they could read the draw-down of chemicals in a customer’s water treatment system, compare it to the system’s standard, and determine whether the system was operating efficiently. If they saw a problem, they would alert the system’s managers. The cost of a malfunction in a major customer like a municipal water treatment system could cost millions of dollars, dwarfing the cost of Nalco’s chemicals. This provided solid differentiation, and once Nalco installed its sensor and linked with the customer’s engineers, competitors were frozen out. Profits rose rapidly.

Less cost. Taggart Brothers, a disguised consumer appliances retailer, had a problem. Some stores were very profitable, but many others were profit drains. When a manager team used transaction-based profit metrics to look into this, they found that most of the profit drains occurred in the last quarter of the product lifecycle in the quartile of stores with the smallest sales volume. They assumed that the problem was high markdowns.

In fact, the transaction-based profit metrics showed a very different cause: the store managers had very high end-of-season stock levels, and did not want to take large markdowns. Instead, they kept the old goods on the shelves, and failed to replenish with the new products during the critical introductory period.

Jonathan Byrnes

Jonathan Byrnes

The answer was obvious. The warehouse had been replenishing stores based on historical demand until it ran out of product. The answer was to cut the replenishment of the low-volume stores first, then the mid-volume stores, and finally the high-volume stores. This painless improvement turned the profit drains into profit peaks.

Profit Deserts

More value. SKF Bearings had a large, underperforming business selling undifferentiated bearings to the aftermarket. When they looked carefully, they saw that they had two distinct segments: machines and automobiles. They determined that the machine customers’ real problem was minimizing machine downtime, and that the bearing’s cost was a small proportion of overall cost. They developed maintenance kits with instructions and products like sealants that would prolong bearing life.

The automobile customers’ biggest problems were locating the correct bearing for the job and obtaining needed tools and instructions. The company developed a variety of kits for specific applications and vehicles. The kits contained instructions, tools, bearings and other necessities. The company’s profits climbed in both customer segments.

Less cost. Craft beer is a hot product with strong sales and high gross margins. When one distributor’s managers used transaction-based profit metrics to look at its business, they were astonished to find that the company’s volume brands (e.g. Budweiser, Miller) had low gross margins but high profits, while the craft beers had high gross margins but significant losses.

The team thought the problem was that they delivered daily to large retailers. But when they looked closely at their transaction-based profit metrics, they saw that the real problem was caused by their small customers (e.g. the neighborhood grocery stores). These customers were ordering frequently.

The volume brand orders had enough gross margin dollars to pay for the picking and delivery, but the craft beer orders were too small to pay for the shipments’ variable cost. When they asked the sales manager why the customers were ordering so often, he replied that he was compensated on the number of orders each day, so he instructed his sales reps to take frequent orders – and each order required a delivery.

This was driving the craft segment into unprofitability. When they started taking orders weekly, the losses turned into big profits.

Three Steps to Growing your Profit Core

Growing your profit core is always a company’s most important objective – but in today’s pandemic crisis it is life or death. Managers can accomplish this in three steps.

  1. Uncover your profit opportunities by installing transaction-based profit metrics. This will show the all-in profitability of every product in every customer every time, which you can aggregate into any company dimension (customers, products, processes).
  2. Develop a systematic, ongoing program to identify and prioritize your tactical profit improvements.
  3. Create strategic profit improvements by deploying “showcase” teams into representative Profit Drain, Profit Peak, and Profit Desert customers. A showcase is an opportunity to explore a customer situation over a few weeks, scouting for opportunities to make quantum profit improvements in your value footprint or cost to serve.

In this way, you can grow your profit core. You are either growing it or exposing it to competitor erosion. The only way to really secure your profit core is to actively grow it. Profit segmentation, rooted in transaction-based profit metrics, is the heart of this process.

Business

Return to work: Flexibility, preparation and communication are key

Return to work: Flexibility, preparation and communication are key 2

By Matt Weston, Managing Director, Robert Half UK

As lockdown restrictions ease for the foreseeable future, conversations across the business world are starting to turn to how employers can safely and seamlessly prepare for their workforce to return to the office.

Research from Robert Half has found that over half (54%) of employees are worried about working in close proximity to their colleagues, while a similar proportion are eager to return to the office due to loneliness working from home (45%) or concerns about missing out on career opportunities (30%).

Unsurprisingly, after everything companies and their employees have done to successfully adapt their operations and working practices to social distancing rules over the last few months, immediately returning to the old ways of working will likely neither be sensible or practical. With safety being the key priority for the ‘new normal’ of office life – communication, flexibility and preparation should be the main focus areas for employers.

With this in mind, what are the challenges and opportunities that employees anticipate as they prepare for the return to work, beyond government and industry supplied health and safety best practice? Furthermore, how can employers best support their staff during this period?

Keep people at the heart of change

It is important to recognise that your workforce has been working through an intense period of uncertainty and change for months, which can be incredibly unsettling. On top of this, working for weeks in isolation without the usual physical interactions with team members could be potentially detrimental to employee engagement and mental wellbeing.

Having adjusted to keep staff connected with one another from a distance with virtual team building exercises, video calls and daily check-ins, as teams begin working in hybrid models with some in the office and others remote, staff engagement will need to adapt again.

Managing people with greater sensitivity and maintaining positivity throughout will be crucial. To help instil a sense of normality and engagement, encourage maximum collaboration between individuals (in accordance with social distancing rules), and make sure teams feel part of company goals and opportunities through regular meetings and communication – no matter their location.

Continuing to invest in technology and offering flexibility will also be important to ensuring that people can continue to work remotely or on-site, either in accordance with their own wishes or as part of your staggered return-to-office plan.

Communicate, communicate, communicate (and listen)

Reassuring staff that they are able to safely return to the office will require continuous communication. From expectations of the physical office, to expectations of how to operate within hybrid teams, these new expectations and new workplace requirements should be communicated to all staff clearly to avoid confusion.

Regular email updates, updates on the company’s intranet and social media channels, as well as frequent town hall meetings (either online or in a smaller setting) could be key elements of an effective communications approach.

Also, consider a feedback channel to allow staff within the team to offer thoughts on their experience of returning to the office and any suggestions on improving the process. Whether on a company-wide basis or a team-by-team approach, schedule regular check-ins to engage with employees’ questions and concerns.

Maintaining open communication channels with your team will be essential for keeping up employee morale and ensuring clarity. For example, if some employees aren’t comfortable with coming to the office every day, then they should have plenty of opportunities to voice their concerns and have them dealt with promptly, respectfully and fairly.

Staggered return-to-office planning

Depending on the size of business and density of office space, maintaining home working arrangements across teams on an alternating basis could make it easier to implement safe social distancing. This involves select teams working remotely while others work on-site on any given day.

An alternating approach to remote working might also reduce the risk of staff feeling pressured or overwhelmed by an immediate return to the office five-days-a-week. After all, some families might be juggling temporary disruptions to childcare arrangements and public transport systems will likely become crowded again. So, a transitionary period will help everyone adjust to post-lockdown office working.

Finally, if you have developed your technology infrastructure to facilitate remote working, you would do well to continue to leverage these new capabilities as in all probability, a mixture of remote and at-office work will be needed for some time.

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Business

Contis enters RBS Capability and Innovation Fund bid seeking £35 million for disruptive SME growth strategy  

Contis enters RBS Capability and Innovation Fund bid seeking £35 million for disruptive SME growth strategy   3

Leading payments provider, Contis, has applied for two grants from the RBS & BCR Alternative Remedies Package, totalling £35 million.  

Unlike most applicants who will deploy funds through a single brand, Contis is taking a completely different approach. The funding will be used to drive fintech innovation in the UK by developing an off the shelf, B2B electronic and card payment technology platform for SMEs. With Contis’ powerful tech stack and regulated status, this will empower hundreds of fintechs to support the SME market with groundbreaking technologies, payments and lending capabilities. Contis today services over 800,000 consumer accounts, 14,500 business accounts and processes £4bn in transactions per year, demonstrating a proven track record.   

UK businesses are facing a challenging economic environment with the impacts of Covid-19 and Brexit. As large corporations and entire sectors are affected, SMEs will play a vital role in the recovery. Contis’ approach is completely disruptive, offering three channels to maximise support for SMEs and sole traders, through three unique brands, all powered by APIs from Contis’ modular and configurable engine. 

1.       Canvas for Business 

Contis is a super-vendor in the world of fintech, offering payments through proven banking rails and card scheme capabilities including issuing pre-paid, debit and virtual cards. They’re linked to digital delivery like Apple Pay and Google Pay, and a trusted tech stack that boasts 99.99% uptime.  

With funding from the Capability and Innovation Fund (CIF), Contis’ technology and regulated services will be made available to the whole fintech community, enabling them to provide dedicated SME accounts with the latest leading-edge capabilities delivered via Contis’ wholly owned, secure, cloud-based technology and apps. Contis’ solution has a firm eye on the need for SMEs to compete internationally, particularly after Brexit, and offers FX integration as standard.  

Canvas for Business will increase competition by providing fintechs serving the SME market with technology that outstrips the big banks. Contis will also provide credit referencing capabilities and empower fintechs to lend to their SME client base through Contis’ own credit licence. Without the constraints of legacy systems, it will enable simple connectivity to accounting and payments solutions, as well as to unlimited future innovations.  

2.       Engage for Business 

Over 150 Credit Unions currently use Contis’ Engage service and technology, and hold an estimated £400 million in undeployed cash reserves. Developed with CIF funding, Engage for Business will enable Credit Unions to launch business accounts and payments products for the first time, and allow excess funds to be redeployed in the SME sector through business support loans. This will revolutionise access to funding for sole traders and small businesses. 

3.       Freedom for Business 

With CIF funding, Contis will also offer large scale SMEs a direct-to-market solution where Contis holds the relationship and provides a bespoke offer to meet the business’ exact needs. 

Contis’ application to the Capability and Innovation Fund is focused on creating the widest possible impact for UK SMEs by fulfilling their accounts & payments needs and driving innovation in SME financial services. 

Through the grant, Contis will empower over 200 fintechs and Credit Unions to provide credit, simplify payments integration into everyday business needs, offer digital credit referencing, provide budgeting tools to SMEs, enable automated payments, give predictive insight on cash flow, provide rewards to SMEs on spending, and much more. 

Peter Cox, Founder and Executive Chairman of Contis said: “Our mission is to democratise payments and financial services for all SMEs, so they’re spoilt for choice with innovative and affordable solutions that meet their exact needs. Our approach, based upon proven technologies, will broaden and disrupt the services available to SMEs far beyond the capabilities of existing providers such as the big banks.  

“By driving competition and innovation, while improving the availability of funding, our approach will increase the services on offer to SMEs and make them more affordable, therefore becoming easier for every entrepreneurial person with vision to run their own businesses.” 

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Business

Four years of digital transformation in four weeks: UK lockdown puts pressure on brands to digitally deliver

Four years of digital transformation in four weeks: UK lockdown puts pressure on brands to digitally deliver 4

Nearly a third (32%) of consumers would switch providers if a brand’s website is unavailable for more than 24 hours

A study released today reveals the scale of omni-channel pressure brands now faced as a result of the Covid-19 pandemic, as consumers flock to apps and websites to as the priority destination to transact with brands.

The UK has experienced a huge leap in use of online services thanks to lockdown, with the public appearing to have less concern for the availability of a brand’s physical location. Research by Sungard Availability Services (Sungard AS) uncovers a “window of availability” that UK businesses now have before consumer loyalty changes:

  • If a brand’s website is down for 24 hours – 32 percent of consumers would switch provider
  • If a brand’s app is down for 24 hours – 28 percent of consumers would switch provider
  • If a physical store is closed for 24 hours – 20 percent of consumers would switch provider

The results by industry paint an interesting picture of the availability timeframes brands are expected to adhere to:

  • For online retailers, excluding grocery retailers – 23 percent of consumers would switch provider if they could not access online services for 12 hours, rising to over a third (34 percent) after 24 hours
  • For financial services and entertainment streaming platforms – 21 percent of consumers would switch provider after 12 hours, rising to 33 percent after 24 hours
  • In the case of online grocery shopping – 20 percent would switch provider after 12 hours, rising to one third 33 percent after 24 hours

The findings also highlight that as digital reliance increases, so will consumer expectations towards availability in the future. Over the coming two years, a third (33 percent) of consumers expect online financial services to always be available, rising to 35 percent for streaming services.

“UK consumers have become reliant on the constant availability of online services, and lockdown has only served to heighten this,” comments Chris Huggett, SVP, EMEA at Sungard AS. “What used to be a choice between physical and digital has now firmly accelerated into digital environments across various industries. As online worlds continue to outpace bricks and mortar as the face of businesses, ensuring constant availability and clear communications on downtime will be key for brands to build trust and loyalty.

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