The quote below is from a research paper by Jonathan Byrnes published in Harvard Business Review in 2006. Much research has been done since which confirms that this remains the case in most companies today, amazingly 10 years later.
”30% of a company’s business by any measure (accounts, products, transactions) is unprofitable.
Very few companies focus on improving profitability of the existing business, day after day, month after month, year after year. Many focus solely on revenue growth. For instance spending millions on acquiring new business with insufficient knowledge of expected profitability. Most understand gross margin, but very few understand the drivers (causes) of cost contained in overheads, and less still the effect drivers have on product/customer profitability.
In this 21st Century, 90% of the cost base of high tech service businesses is still being classified as “overheads”. This doesn’t even begin to explain which levers to pull, that is volumetric drivers to change, to improve profitability.
In this blog series I will explore five key areas where most businesses are unprofitable, and in so doing will explore how you can “reveal hidden profits”.
- An understanding of end-to-end process cost alone reveals sales orders with revenue less than the cost to serve.
- Having costed end-to-end processes, the next step is to focus on waste, uncovering more hidden profits. We often find sub processes which are not at all aligned with business objectives, and can be stopped altogether.
- A full analysis of sub process costs to serve customers and channels will commonly reveal that at least 20% of customer channel combinations have a higher cost to serve that the revenue they earn.
- Similarly, a view on product life cycle profitability will normally show a plethora of unprofitably products, after charging the full cost of development, replenishing finished goods stocks, and cost to serve.
- A focus on future costs is important. Decision makers want information to help with future decision making, much more than a backward-looking analysis of where they went wrong.