Improving Your Business: One Profitable Customer at a Time Part 2 - A process to improve profitability

 [Editor's note: During the early days of the Pandemic, many companies did an excellent job of reducing expenses and conserving cash flow. However, we have observed in the last 12 months a disturbing trend. In the drive to improve the top line, companies are beginning to lose focus on the importance of "profitable growth." We decided to re-run a series on profitable customer growth. In Part 1 we outlined how a few customers can drive net profitability. This is Part 2 - a process to improve profitability. We hope you find it useful. -DPM]

 Improving Your Business: One Profitable Customer at a Time

 Part 2 - A process to improve profitability

 

Many managers seem to rely on intuition to determine if a customer is profitable or not. Sometimes the intuition is correct and sometimes it is not. Besides one's intuition not being correct, relying on intuition to determine customer profitability confuses the organization. Why? One's intuition varies greatly depending upon position in the organization and how the relationship is viewed. For example, for the sales vice president trying to make a sales goal, that unprofitable customer can be very attractive. For the technical director who must provide support to that same customer, the relationship appears very unappealing. There must be a process for assessing customer profitability and it needs to be used consistently throughout the organization. Here are some suggestions:

Define your core strengths 

 Customer profitability centers on what a company does well and then matches these strengths with a customer group which values them. BMW is known for its ability to design and produce high quality cars with great road handling characteristics. As an organization, it understands this strength and seeks to cater to customers who seek cars that have excellent handling characteristics.

Take a hard look at your organization. What does it do exceptionally well? What differentiates it in the market? Ask this question of people throughout the organization. The responses may differ based upon who you talk to but you should hear some consistency about the core strengths of the business. Expand your analysis beyond internal perceptions; ask your better customers why they buy from your company. This is the first step in identifying where your organization needs to focus its efforts.

Study and Determine the characteristics of profitable and unprofitable customers.

Take the top 10% - your most profitable customers. (Mead Consulting can help you with a process to identify these customers on a net profit basis).Do these customers have similar characteristics (e.g., technical requirements, order size, etc.)? What types of products and services do they purchase? Are these customers more profitable because they are more loyal (sales and marketing expenses are less)? How do the characteristics of this customer group align with your company's strengths? You will likely see an alignment if you look closely enough.

We have worked with a company in the software industry with a long history of profitable growth. Its projects are typically long-term in nature and management takes customer selection very seriously. The company's disciplined customization and project management process includes a great deal of client collaboration. At the heart of the process is developing a good understanding of project objectives and the customer's customer. Key to the company's long success has been selecting clients whose approach fits the process and are good candidates for repeat business. The company avoids single project clients shopping solely based on price, since this approach does not fit well with their collaborative process.

After you have looked at your top customer group, repeat the process with less profitable customers. What are the common characteristics of these customers? They are likely very different than those more profitable customers.

Establish guidelines for evaluating customers.                                                          

If you wish to move beyond simply talking about customer profitability, you must establish guidelines for evaluating customers. Guidelines could include:

• order size (orders in quantities the company is set up to handle)
• product mix (customer is not just cherry picking to get the lowest priced products or services. This is important if you offer loss leader products)
• technical support requirements (can the customer be effectively served?)
• growth potential (does this customer have the potential to grow?)
• how long will you let a customer receive special treatment (i.e., "freebies", special pricing or terms, etc.) on "potential" alone

As you can see from the above list, it is a combination of financial measures, buying practices and long-term potential. Do not worry about developing the "perfect" measure. The most important thing is to develop consistent parameters that make sense for your business. If you apply these criteria consistently, you will see a clear segmentation between your best and worst customer relationships.

Taking Action - One Customer at a Time. Focus Time on "high potentials"

Now that you have defined the profile and characteristics of profitable customer relationships, begin putting the evaluation process into action. One of the first places to start is with prospective customers. Focus your energies and sales efforts on prospects consistent with your evaluation criteria. Prospects that do not fit most of your evaluation criteria are not likely to develop into long-term profitable customers. Make sure your sales team has a clear understanding of the types of prospects you are targeting.

As you attempt to improve profitability, focus on your top quartile relationships as these customers often represent one of your best growth opportunities. Map out clear strategies for retaining and growing these relationships. Learn more about your customers' businesses and how they serve their customers. This collaboration can uncover new opportunities and help you forge stronger relationships. As you eliminate the unprofitable relationships, this frees up time and other resources for your more profitable customers. This is an important principle of executing a successful fewer and deeper strategy.

 

Don't fire unprofitable customers. Modify the unprofitable behavior.

What can you do about unprofitable relationships? Be aggressive about changing those unprofitable relationships. Make certain the sales team understands that the customer must become more profitable within a given time.

 

Don't just fire customers, however. Often, it is we, the sellers, who have encouraged or permitted "unprofitable behavior." These customers may offer profit potential - particularly if they fit many of your evaluation criteria. Look for differences in how you are serving these customers versus your more profitable segment. You may be overlooking product or service opportunities that could enhance profitability, or you may be making inaccurate assumptions about client needs. One client's management team believed it was obligated to supply certain customers with unprofitable commodity products in order to sell more profitable, high margin product lines. Our interviews with customers revealed otherwise. There were many alternatives for procuring commodity products and customers were primarily interested in the more innovative, higher value product lines. A subsequent change in product mix has boosted profitability significantly.

If a path to profitability cannot be found, use pricing as a way out of a relationship. Be sure to provide recommendations for alternative vendors. You never know when an unattractive customer can change and become desirable.

In current inflationary times, be creative to ensure profitability.

With rising input costs, maintaining profitability can be challenging. Some companies with significantly rising or uncertain component prices, have resorted to surcharges based on some index for those components. In that way, pricing changes are somewhat transparent and the customer can see that one day the prices may be adjusted downward.

If there is no clear path to profitability under your current product and services umbrella, consider offering alternative services

Many successful middle-market companies take pride in their premium, high touch service levels. Each customer usually receives the same products, services, and delivery regardless of profitability. This approach, combined with the size or buying practices of some customers, makes some relationships appear hopeless. If there is no clear path to profitability under your current product and services umbrella, consider offering alternative services for these customers. This may be a particularly viable alternative if you have a large segment of unprofitable customers with similar needs. Depending on your business, alternative services may entail different methods of selling (e.g. inside sales vs. more costly face-to-face), a different scope of service or different pricing structures. These changes can completely change the profitability picture for these customer relationships.

_______________________

The Mead Consulting Group has been helping clients identify and improve customer net profitability and execute strategies that drive profitable growth. For a free consultation, contact me at meaddp@meadconsultinggroup.com or (303)660-8135

The Mead Consulting Group has been helping clients develop and execute Strategic Growth & Execution plans for many years. Check out our website for descriptions of some client success stories.

Best regards,

Dave Mead         

Improving Your Business: One Profitable Customer at a Time - Part 1 - A Few Good Customers Can Drive Your Growth

 

Improving Your Business: One Profitable Customer at a Time Part 1 - A Few Good Customers Can Drive Your Growth Over the last few years there has been increased focus on the strategy of "fewer and deeper" as a strategy for growth. The logic of this strategy is straightforward-focus your resources on a fewer number of customers with whom you can have a deeper relationship and this will cause increased growth. Please note that we are not advocating extreme customer concentration, as this leads to excessive risk and can be a discounter of value when a business looks to sell. In this series of articles, we will address how to improve business results dramatically by gaining a deeper understanding of most profitable customers. Selecting the Right Customers In most businesses, a relatively small number of customers generate the bulk of the revenue (typically 20% of customers generate as much as 80% of revenue). One recent client derived 98% of their revenue from only 25% of their customers. This client assumed that the remaining 75% of the clients represent high margin business and thus, a greater share of profitability. Unfortunately, for this client and many similar companies, this usually is not the case. According to a study of retail banking performed by KPMG several years ago, 140 to 170% of profits can come from 20% of customers while 80% of losses can be attributed to only 20% of customers. Research completed over the past fifteen years by The Mead Consulting Group, with data from over 1900 companies ranging from $4 Million to over $5 Billion in revenue, shows a similar pattern. The Table below illustrates an extreme example. In one company as few as 2% of the customers generated 800% of the profits, while the losses are generated by fewer than 10% of the customers. The balance of the 88% of the customers, remaining in this example, is about breakeven.

Below, we will address the costs of unprofitable customer relationships and suggest strategies you can put in place in your business to improve profitability and begin to implement a "fewer and deeper" strategy for growth. The Cost of Unprofitable Customers There are several reasons why managers pursue unprofitable customers. One of the biggest we have found is the passion that many middle-market company managers and business owners have for selling. These managers often place a premium on attracting new customers and generating top line revenue growth. This passion for the top line may be rooted in a fear of not having enough customers should there be a business downturn. This approach can lead companies in a wrong and unprofitable direction. If managers do not focus efforts on the right (profitable) customers, the same passion that was a driver in building the business can become a downright anchor, dragging down profitability. An in-depth analysis of one client company revealed net profit would be two and a half times higher without 65% of its customers! This client provided a striking example of the cost of unprofitable customers. This manufacturing company provided excellent service and, as a result, continued to expand its number of customers over the years. Each year they added customers and seldom, if ever, lost a customer. Unfortunately, 65% of their customers made up a paltry 5% of total revenue. To make matters worse, these small customers were the most frequent buyers of the company's most unprofitable product lines. A detailed analysis revealed the company's net profit would be two and half times higher without 65% of its customers! We did not advocate "firing" these customers but rather provided a procedd to improve profitability which we will cover in the next article in this series. Companies, large and small, struggle with how to measure customer net profitability. Some of the failure to focus on more profitable customers comes from inadequate accounting. Companies, large and small, struggle with how to measure customer net profitability accurately. In many companies, management may know how much gross profit they are generating from each customer. The problem often occurs in the costs that occur after gross margin. The resources it takes to sell, administer, and service customers makes the issue of real profitability more complicated. For example, consider the customer with a relatively small level of sales but a healthy gross margin in both percentage and absolute terms. This customer buys frequently (lots of invoices), has high service requirements (always orders at the last minute and expects overnight delivery), and stretches payment terms to 120 days. This may not be a truly profitable customer. On the other extreme, it could be a large customer who purchases a significant volume and has a gross margin that is relatively lower as a percentage of revenue. This customer purchases in larger quantities (fewer invoices), has reasonable service demands (does not order at the last minute), and pays in a reasonable amount of time. Which one is the more profitable and more desirable customer? This is a question that is too infrequently asked in many companies because such "below-the-line" costs are not known. Opportunity cost - time with marginal customers versus time with high potential customers. Even if you are confident that you can accurately determine customer profitability, there is an additional factor to consider - opportunity cost. What is the opportunity cost of having a salesperson traveling to, or calling on, a marginal customer versus spending time with top priority customers and prospects? Costs such as these make the bottom quartile of your customer base even less profitable than you may realize. These relationships not only result in poor customer profitability, but can also be a detriment to other existing and prospective customer relationships. Executing a "fewer and deeper" strategy requires you to focus your resources on relationships that matter. Next - Part 2 - A Process to Improve Profitability The Mead ConsultingGroup has been helping clients identify and improve customer net profitability and execute strategies that drive profitable growth. For a free consultation, contact me at meaddp@meadconsultinggroup.com or (303)660-8135

Differentiating Customer Service: Giving each customer what they need can lead to greater profits

 [Editor’s Note: Over the last few years, companies have begun to really scrutinize how their Customer Service actually alienates customers. This has led to the surge in Customer Experience or Customer Success groups. It brought to mind an article we first published 8 years ago on the importance of meeting individual customers' needs. I hope you find it useful. ” -dpm]

 Differentiating Customer Service: Giving each customer what they need can lead to greater profits¹

 What do you do when you're waiting for a slow elevator?

A number of years ago, a company that had just built a major building realized their elevators were intolerably slow. What to do? It was too expensive to reengineer the elevators. After thinking about the problem for a while, mirrors were installed in the lobby and elevators. It turns out that people will tolerate a much longer wait if they can see themselves in a mirror.

Today, most tall buildings have mirrors or polished metal surfaces in their lobbies and elevators.

 Disney World has a similar problem. The waiting lines for attractions are often very long, and children are impatient. So are adults. The customer service group at Disney studied this problem at great length, and made the field into a science. They now know exactly how long people will wait before they need to be distracted. Consequently, when you queue up for Pirates of the Caribbean or other top attractions, you are likely to be engaged at carefully predetermined intervals by wandering characters, videos, and mirrors. Also, lines are laid out in a serpentine manner, providing a feeling of constant progress. Hate lines? Disney also has programs like offering advance reservations and providing waiting customers with "buzzers" that will notify them when the ride is ready - notify them at one of the restaurants, no less, and several other ways like Genie and Lightning Lane to skip long  lines.

 Here's how one top hotel, which differentiates itself through its reputation for great service, handles customer service. Every employee is empowered to spend up to a few hundred dollars without approvals to rectify customer service errors. If laundry is late, it arrives with a bottle of wine. In this way, the hotel turns lemons into lemonade.

When you do a good job of fixing a customer service problem, you often earn more customer loyalty than if there had been no problem. This is when you can show your worth, and earn your customer's trust.

 What is customer service?  Perception is Reality!

This raises a critical question: Exactly what is customer service? Nearly every company has numerous customer service measures, but how many of these really produce the right results?

Is customer service what the customer experiences? Not exactly. Customer service is what the customer perceives and remembers. The acid test of customer service is the customer's future behavior. If Disney World had managed to shorten its wait time by 20 percent, but had no distractions, customer service complaints would have gone through the roof.

 Consider the following customer service measure. A copier company had a policy that when a customer calls for repairs, a repair tech will arrive on the scene in two hours, 95 percent of the time. Sound good? Think about the following issues.

This policy treats all service calls the same. Some service calls are prompted by machine failure, while others may be caused by cosmetic issues, like a loose faceplate. The policy also treats all customers and customer situations the same. One call might be for a non-functional machine that happens to be the only copier on the executive floor of a major account, while another call might be for one of the eight copiers in the company's administrative department.

 Customers' negative perception of service is primarily formed by their worst experiences, not by the average. For example, even if the copier company fully met the policy above, the disappointed 5 percent would have far different reactions if the wait time were four days, rather than two hours, ten minutes. Moreover, the policy focuses on when a service tech arrives, not on when the problem is fixed.

This policy reflects the cardinal error of customer service: It measures what the copier company sees, not what the customer sees. It's an operational measure, not a customer measure.

 Product reliability. As you get better, the customer sees you as being worse. 

Think about this one. The smart phone company develops a great quality process, and its smart phones become very reliable. What's the impact on customer service? The answer is counterintuitive. As the products become more reliable, the easy-to-fix problems go away. Those that remain are the most intractable ones, those that take the most time and are most difficult to fix. When customers focus on their bad experiences, they often perceive that customer service has degraded.

What can you do about this? Several things.

 ·     First, shape your customer's perception. Some companies issue report cards showing their actual service. In this context, the occasional problems are seen to be just that, occasional problems.

 ·     Second, get in front of the problem. Some companies have carefully analyzed the key points at which preventative maintenance makes a big difference. Others have designed machines with the capability for self-diagnosis. Some of these machines even have the capability to call for service, without human intervention, when they "sense" an impending problem.

 ·     Third, make the products easier to fix - The “Wall of Washers.”  Most often, the root problem behind lengthy repairs is lack of quick access to needed parts. One manufacturing client company, for example, created what they called a "wall of washers." They saw that their product design engineers were specifying unique washers for each of their products. This caused huge problems in keeping local spare parts inventories, and resulted in big delays in field repairs. To emphasize the point, one clever vice president had his staff collect every unique washer and paste them on a wall. There were over 1,000. The vice president brought the product design engineers to see the wall of washers. As a result, the engineers quickly began to redesign products to have a maximum number of common parts. The impact on service intervals, the time between when a customer calls and when the machine is fixed, was striking. And, inventory costs dropped through the floor. Does your company have products with lots of unique components?

 Product availability

Measuring customer service is a common problem in distribution and retail. Many locations have thousands of products, and it is costly and difficult to keep them all in stock. In addition, sometimes products are present in the retail store, but not in their proper place on the store shelf. What's the right measure of product availability?

The answer is more complicated than simply whether the shelf is empty. A lot depends on the customer's need.

For example, in many physical retail situations, customers come into the store with a generic need such as a tape measure, a plastic container, or an inexpensive television. For these situations, most stores carry two to four products that would fit the customer's need, and the customer is largely indifferent. In this context, if one product is missing from the shelf, the customer is still perfectly satisfied.

 Therefore, in these cases, the proper measure is a "substitution group." For most retailers or distributors, over 60 percent of their sales engagements fit this customer behavior profile. Yet most retailers and distributors focus on product-specific availability measures of customer service, and this causes huge inventory costs. With online suppliers developing a “substitution group” is even simpler.

 The hospital industry presents another sort of customer service misunderstanding. In a typical hospital, the definition of an out-of-stock situation is one in which at least one ward and the stockroom both run out of a particular product. Yet the hospital may have a large amount of the product scattered on other wards. The problem is lack of a mechanism to locate the product once it leaves the stockroom.  

This created an important opportunity for a supplier to install a vendor-managed inventory system that included both stockroom and wards. Here, the vendor gained great efficiencies from reducing safety stock by cross-sourcing from ward to ward. In fact, this is one of the major hidden benefits of vendor-managed inventory.

 Effective customer service. Keeping your promises by meeting individual needs.

In earlier eLetters we have written about the importance of differentiating between customers. Customer service differentiation is the key to getting out of the vicious cycle of building inventories because service is poor, then cutting inventories because costs are high, then building inventories again because service is poor again....

The key is to understand that great customer service means keeping your promises to customers, but that these promises, the service intervals or order cycles, can and should be different from customer to customer and product to product. For nearly all customers, the most important need is to get what they plan on and expect. This is much more important than the cycle time, per se.

Many leading companies are moving beyond tactical definitions of customer service to find powerful ways to make their customers more profitable. Customer service is the starting point and ending point for any effective account relationship. The key to success is clear thinking about what it feels like to walk in the customer's shoes. 

 

 ¹ Excerpted from "Nail Customer Service" by Jonathan Byrnes, HBW  

Congratulations to Restruction on its sale to Structural Group

Congratulations to Tim Gumina, Bruce Collinsand Mike Lutonsky and the Restruction team on the successful sale to Structural 

STRUCTURAL ACQUIRES RESTRUCTION

ELKRIDGE, MD (January 3, 2022) – Structural Preservation Systems, LLC, a Structural Group company – the largest concrete repair and maintenance provider in the United States – has acquired Restruction Corporation’s business. With offices located in Colorado, Arizona, and Utah, Restruction is a contracting company that specializes in concrete repair and structural strengthening.

“Restruction will increase our capabilities, resources, and presence in the mountain west region of the United States,” said Jeff Venanzi, President of Structural Preservation Systems, LLC (STRUCTURAL). “By adding Restruction, we have strengthened our team with a superior group of construction professionals providing excellent service throughout the region. Restruction’s commitment to quality and safety, approach to customer service and dedication to employee training are a great match to STRUCTURAL’s mission, values, and operating principles.”

 “STRUCTURAL has built a very impressive organization. Their ability to integrate technologies, engineering, and construction is a great added benefit to Restruction’s specialized contracting services,” said Tim Gumina of Restruction Corporation, and added, “we at Restruction have always looked to STRUCTURAL as a leader in this industry.” 

The combination of STRUCTURAL’s national presence, 20 offices across the country, and Restruction’s strong reputation in the mountain west provide a great complement of expertise and industry knowledge that will allow us to better serve our clients.

For more information, go to www.restruction.com or www.structural.net.

Companies ignore strategic planning during the pandemic

 Companies ignore strategic planning during the pandemic

[Editor’s Note: Happy New Year! We hope 2022 will be great year for you and your buisiness. This recent headline in the WSJ caught my attention. We have seen some companies operate with a short-term focus and wonder, “what will be the cost of becoming too day-to-day tactical?” -dpm]

 

The Covid-19 pandemic has resulted in stresses on businesses, business owners and CEOs like never before (Note: I am very tired of the word, “unprecedented.”). Uncertainty has been the norm since March 2020: The virus, variants, safety protocols, regulations and restrictions, record levels of absenteeism, labor shortages, employee turnover, supply chain shortages, increasing input costs. Faced with this high level of uncertainty, companies have necessarily focused on short term operational issues. However, many companies have deferred strategic planning in the process. Many more have not attempted to anticipate various scenarios. Some companies that have made the time to do both scenario planning and strategic planning have been able to seize opportunities.

Are we inadvertently creating a culture of short-term focus? It takes 3 to 5 years to change a culture. During the last recession, we observed that some organizations became so cautious over the 2008-2012 period, that their culture became very risk-averse, and they were missing opportunities in 2013-2014. As we enter year 3 of the pandemic, are we in danger of doing something similar?

We cannot predict the future, but we can prepare for various scenarios. A recent article by Greg IP in the WSJ pointed out just how poorly we are in trying to predict the future in everything from inflation, to the duration of the economic impact of Covid-19, to the black swan event in 2008. Trying to predict the future is a mistake in company planning. You are guaranteed to be wrong – in one direction or the other. Scenario planning helps companies rehearse how they would react under several different circumstances – thus the management team knows how to react as events unfold in the future.

Has your company done strategic planning in 2021 to prepare for 2022-2024? Or have you kicked the can down the road and been focused on the short-term operational issues? It is not too late to get started. Most significant changes in market share occur during periods of economic disruption. Are you missing a major opportunity?

Some organizations may say scenario planning is too difficult and elect to take a simpler course.  Most organizations perform traditional business planning/ budgeting because it is comfortable and addresses a short timeframe. However, we now know that the world is uncertain and interconnected. Companies can no longer ignore uncertainty or try to assume it away.  As author H.L. Mencken is quoted, "For every complex problem, there is an answer that is clear, simple, and wrong."

 

This is your opportunityto build flexibility into your planning and adaptability into your leadership and culture. Companies that are scenario planning are examining different possibilities of the future and determining their competitive responses. They are modifying the trends and information that they monitor so that they can develop "early warning" signs.

Check out the full scenario planning article series on our website.

  

For more information on how you can take your planning process to the next level, contact me at (303) 660-8135 or meaddp@meadconsultinggroup.com   

The Mead Consulting Group has been helping clients develop and execute Strategic Growth & Execution plans for many years. Check out our website for descriptions of some client success stories.

Six Steps to Help Companies Weather the Inflationary Storm

 [Editor's Note: In a recent edition of Issues for Growth, Vol. No. 11 we wrote about "Inflation Uncertainty." Numbers from Bureau of Labor Statistics show that inflation was 6.2% year over year for October, the highest surge in 30 years. While there is still some debate about whether inflation is transitory or not, companies cannot ignore the possibility of systemic, longer-term inflation in their planning. This article from HBR illuatrates 6 steps that companies can take to weather the inflationary storm.             - dpm]

 

6 Strategies to Help Your Company Weather Inflation ¹

With the economic recovery gaining steam amid an uncertain pandemic path, companies are scrambling to deal with increasing commodity prices, supply constraints, and higher wages caused by labor shortages. In the first half of 2021, the producer price index (PPI) rose 10% in the G7 countries. The PPI measures the prices of goods immediately postproduction and serves as a critical indicator of the pressure facing companies.

The last time the world saw a similar bump in PPI was in in the first half of 2008, the early months of the Great Recession. Companies that weathered that storm the best took decisive steps to counter rising inflation by pushing through price increases consistent with PPI — but that alone was not enough. The best performers also took significant steps to boost productivity, primarily by cutting costs. Our analysis of the performance of 5,700 global companies found that those that cut costs to improve productivity the most during previous inflationary periods achieved higher total shareholder returns (TSR) — 27% was the median — than companies that took less action. (We determined productivity by measuring EBITDA and revenue growth.) The evidence is clear: Even as many companies deal with inflation by devoting more energy to adjusting prices or finding new sources of growth, cutting costs remains an important part of managing in this economic environment.

But what are the steps that typically make a difference?

BorgWarner, a U.S.-based automotive supplier, faced major challenges in the 2008–11 inflationary period and deployed a number of levers to outperform the market. The company reduced work and the labor required to perform it, including shifting production capacity in line with customer demand. It centralized information systems to support more efficient back-office processes, created a global procurement organization to spend and buy better, and focused capital spending on the most important strategic issues. These actions helped the company attain 43% compounded annual TSR growth.

We found that companies achieving such gains from cost programs during inflation focused on similar tactics. However, this current inflationary period is unique: Labor markets are volatile, consumer demand has not dipped the way it did in 2008, and supply chains are more constrained. As they prepare for higher inflation in this new environment, companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities. They need cost programs that allow them to grow top-line revenue and reduce their dependence on volatile labor markets while improving employee retention. Successful companies deploy six tactics to achieve these goals. We’ll look at them one by one.

Get spending visibility:

 High-resolution spending visibility is the foundation of any expense management capability. It enables managers to fully understand where money is spent and who spends it. In an inflationary period, it is critical to establish repeatable, end-to-end, actionable visibility of spending by cost category, business process, function, and business unit. This is the foundation for all other productivity efforts. It enables the right level of accountability throughout the organization to ensure that all decisions are made knowing the full impact on the P&L.

Differentiate between strategic and nonstrategic spending:

 In any disruptive environment, odds are higher that executives will make choices that jeopardize the company’s long-term strategy. It’s not uncommon to make broad-based cuts that are not aligned with the company’s strategy — and as a result, will not yield optimal return on investment nor maximize shareholder value in the long run. Instead, clearly distinguish between strategic and nonstrategic cost-cutting, the protecting of signature customer and employee experiences, and fiduciary requirements, for example. Use consistent, accessible financials to prioritize higher ROI investments. A sustainable cost management system should fuel a company’s strategy and enable the business to out-invest competitors, at scale, on strategic costs in both good and bad times.

Managers must identify where investments should be pulled back and cost savings realized; where you can more selectively trim costs to improve the return on operating expenses; and where you can boost growth through greater investment in the strategic capabilities needed to achieve differential results. This investment posture sets the stage for reshaping the P&L, cost structure, operating model, and capabilities that will enable the chosen strategy. It helps leaders agree on such basic decisions as which capabilities need to be best in class — built to enable and sustain competitive advantage — vs. best in cost. It positions a company to make better decisions about deploying increasingly scarce resources to reinvigorate its strategy and maximize shareholder value in times of economic disruption. That includes investments in people, for example. For companies like Walmart and Target, for instance, the decision to invest to allow employees to pursue debt-free education is a strategic investment to differentiate the retailer in the competition for labor.

Unpack the drivers of spending:

 With improved visibility and a clear sense of how costs align with strategy, the next step is to develop a more robust understanding of the real drivers of cost in an inflationary environment. Dissect the rate (prices paid) and consumption (quantity or volume), including the underlying drivers, for critical cost categories. This step enables companies to create granular, trackable initiatives linked to a unique driver of a broader cost category. It sets the stage for a host of possible moves. Among the biggest: establishing a preferred vendor program to increase buying power, reevaluating the right make-vs.-buy mix for core functions like software development, and deploying AI-powered sourcing tools to generate automated insights from spending data, flagging savings and compliance opportunities in real time.

These steps can deliver real, near-term savings. One energy company conducted a full review of its applications and identified more than 80 that could be eliminated in the short term and save the company an annual $10 million. Getting this sophisticated view of what’s really driving spending is particularly critical in rising inflation because it enables companies to advance to the next three tactics.

Reduce consumption:

 With increased spending visibility and the ability to isolate drivers, companies can tailor their approach to match the inflationary environment. For example, even if companies aren’t able to buy better due to supply chain and producer pricing pressures, they can make sure that they spend better. One way to do this is to set up a spending czar or spending control towers. When a global healthcare company realized that too many acquisitions left the company with cost inefficiency, it empowered a spending czar to break down silos and make decisions across the organization. It was the first big step in finding more than $300 million in annual cost savings.

A focus on spending better can also lead to cross-functional change. One large technology company determined that many of the costs issues it faced while constructing new facilities were created from groups outside of the decision makers on new build projects. Increasing cross-functional collaboration ultimately allowed the company to cut construction time by six months, saving more than $400 million in the process. Setting up cross-function spending controls helps companies zero in on the costs that can no longer be justified or can be avoided by doing the work differently, allowing the company to continually prioritize spending and make sure that any savings identified don’t creep back in as time goes on.

Eliminate work:

 With labor shortages and ballooning labor costs, eliminating the work itself has the greatest impact. Companies that do this well use a clean-sheet mindset, or zero-based redesign, which can help reset the way work is done. This approach forces companies to scrutinize both what activities are performed and how those activities are performed, with specific levers to eliminate unnecessary work and automate.

As inflation looms, companies across industries are reexamining their work and determining what adds the most value and is absolutely necessary, providing both cost savings and the opportunity to deploy dollars and scarce labor resources to what will help them grow. Eliminating work can take many forms. Snack maker Mondelez International is well on its way to streamlining manufacturing by eliminating one in every four products in its portfolio, a goal it set in the opening months of the Covid-19 pandemic. Hotels everywhere are limiting housekeeping by making it an opt-in vs. opt-out service.

Automate:

 After eliminating work, the final tactic is to automate. Technologies like robotic process automation (RPA), workflow, and intelligent document processing can free up workers and make each person much more effective at creating value. At retailers, for example, important associates often spend too many hours, days, and weeks manually inputting item and product data (e.g., case size, pack size, dimensions, website images) when they could be working on more strategic activities, such as analyzing data and generating insights.

In addition to labor cost savings, automation can promote stability in an organization. Our research found that companies that had invested more in automation before the pandemic have weathered the crisis better than others. Meanwhile, in our experience they’ve generated higher revenues and see fewer disruptions to the supply chain, workforce productivity, and demand. Companies can use the productivity gains and cost savings they accrue from deploying the previous five tools to invest in automation.

Despite the importance of automation, digital transformations often don’t deliver the desired results. A Bain survey found that 76% of digital transformations settled for dilution of value and mediocre performance. Orchestration is the most important transformation element in digital leadership — without the right approach a digital transformation can’t move at the speed or scale needed to deliver the results companies need to see. Companies that are successful don’t just invest in identifying the opportunities and potential solutions; they make sure they have the right plan in place to roll out automation. This will be a critical factor for everyone looking to leverage automation to combat inflationary pressures.

Companies as diverse as Cigna and David’s Bridal have been publicly reporting the benefits of automating at scale. The value Cigna realized from automating processes leaped from $2 million to more than $100 million within a year, and the company expects that ultimately to reach $1 billion. When David’s Bridal debuted its Zoey messaging concierge service in early 2020, it reduced contact center operating costs by over 30% and shifted 30% of appointment-booking phone traffic out of stores, allowing employees to focus on providing more value-added in-person services.

***

These and other companies are preemptively building cost management systems that allow them to strategically invest while gaining the resiliency to overcome high inflation. By playing both offense and defense in a disruptive environment, they position themselves to outpace less-proactive competitors long after the volatility ends.

¹ Harvard Business Review by Jason Heinrich, Simon Henderson, Tom Holland, and Megan Portanova September 28, 2021 

Is Accountability a Problem in My Organization?

[Editor's Note: For over 25 years, Mead Consulting has been conducting assessments at client companies to identify barriers and challenges to growth to the next level. Lack of true accountability continues to be the most frequent issue. I thought it might be useful to address accountability in this article. If you are beginning your planning cycle, a lack of accountability may sabotage your ability to succeed.             - dpm]

 Is Accountability a Problem in My Organization?

Speaking with a new client, the CEO asked me to identify the most frequent problem we see with our new clients. I responded, "Lack of true accountability." He seemed skeptical and suggested that we wouldn't find that to be true at his company. So I asked him, "Does every employee feel responsible for the company's success and know what their role is in ensuring that success?" 

It occurs to me that people have become numb to the meaning of the word, accountability, and that it always seems to apply to everyone else, some other department, etc. -"They need to be more accountable for results."

What are some of the attributes in an organization lacking accountability?

Do any of the following look familiar?

Unclear Vision and Direction: Employees do not know the keys to company success - or they all have different views as to what they are.

o Goals may be unclear, confusing, or there are too many different goals

o "We keep adding initiatives and projects and never take anything off the list."

Micromanaging or Command and control: Employees do not feel they have control over how to deliver results

Lack of Job Understanding or Training: "I have never been shown what is expected"; "I didn't receive any training"

"I don't know where to go for help"

Undervalued: "No one cares about my opinion." People do not feel their opinion is valued - that is, every employee

People do not feel comfortable delivering bad news such as the "project is behind schedule" or "we have a major quality problem." So they ignore or sugarcoat things.

People do not feel trusted.

o "I am not confident my efforts will be rewarded"

o "I suspect that my manager (or the company leader) may take advantage of me"

o "I question my manager's (or the company leader's) motives"

o "I am sure they will take credit for my accomplishments"

Departments do not cooperate with each other. We constantly practice the "blame game"

Employees are Not Engaged - "People do just enough to get through the day."

Lack of accountability can paralyze an organization.         

Be honest. Do you recognize any of the above in your company? On the long personal and organizational "to do" list, accountability should be at the top of the list. Lack of accountability can paralyze an organization and prevent it from moving forward. If you see a fatal flaw in yourself, your current leaders, or your organization in any of the above, you should address it immediately. We can help.

The Mead Consulting Group has been helping clients develop and execute Strategic Growth & Execution plans for many years. Check out our website for descriptions of some client success stories.