Who is responsible for profit in your company?
They say it’s lonely at the top. For many CEO’s it can be very lonely when it comes to responsibility for profit. At a recent presentation for a group of CEOs, I asked the question, “Who is responsible for profit in your company?” The answers were not surprising. While several said it was the CEO, CFO, or the senior leadership team, the overwhelming majority responded that everyone in their company is responsible for profit. While the CEOs believed this, when we begin working with companies this is one of the questions we ask a cross-section of employees. We rarely get a consistent answer.
“Everyone is responsible for making a profit.” Is that really true? We all like for our co-workers to be thinking about profit, but are the pieces in place to support this grand idea?
- Profit Must Be Clearly Defined, Visible, and Understood
Can employees clearly see how profit is generated? In many organizations, profit is the “mysterious” remainder of the monthly aggregation of revenues less the aggregation of costs and is not known until after the month is over…too late for co-workers to do anything about it. How can we expect them to affect something that seems too complex for any mere mortal to understand?
- Is the Company Organized for Profit Management?
Decisions need to be made close enough to the customer to impact profit on a daily basis.
Are you measuring and reporting against profit at an individual customer or individual product level on a relatively frequent basis? These metrics need to be visible to the entire company? At least the pieces they can affect!
- Are Compensation and Rewards Aligned with Net Profit?
There’s an old expression: “You get what you pay for!” In the world of compensation it is very true. If you are compensating the sales and marketing departments for revenue generation and operations for achieving AVERAGE product cost, the expected outcomes may surprise you. Even though revenues may increase, being on the incorrect extreme of those average costs can cause you to have very poor results. Compensation plans need to directly reflect the achievement of NET PROFIT PER CUSTOMER.
THE RESULTS CAN BE COMPELLING
One client company that now has a clear view of customer profitability and an employee group reorganized around responsibility for profit has seen dramatic change. In the first full quarter of implementation, this wholesale distributor saw customer net profit margins grow by FIVE PERCENTAGE POINTS in the targeted customer groups.
On an annual base business of $10 million, that’s a $500,000 increase in net profit; at $70 million in annual revenue, that could be a $3.5 million increase in net profit.