What To Do When Half Your Company is Not Profitable

A few days ago, CNNMoney.com/Fortune posted a very informative review of my new book, Islands of Profit in a Sea of Red Ink. Here’s the review by Anne Fisher:

What to do when half your company is not profitable

By Anne Fisher, contributor
November 12, 2010: 11:54 AM ET

FORTUNE — Sure, the global recession took a big bite out of earnings at plenty of companies, but according to profitability guru and M.I.T. senior lecturer Jonathan L.S. Byrnes, the downturn has masked an even deeper and stickier problem: Most businesses are still operating the same way they did in the Age of Mass Markets, which Byrnes believes ended about 10 years ago.

In Islands of Profit in a Sea of Red Ink: Why 40% of Your Business Is Unprofitable and How to Fix It, he explains how to thrive in what he calls the Age of Precision Markets, an era ushered in by Internet-empowered consumers and fraught with changes “as profound and disruptive as those that occurred when roads were first paved.”

In his consulting work, Byrnes has noticed over and over again that at companies still clinging to mass-market thinking, it’s perfectly possible for everyone to meet their targets and still be stuck with huge chunks of business — often as much as 40% of the whole enterprise — that are “unprofitable by any measure,” he writes.

One key to turning that around is an accounting system Byrnes calls profit mapping, designed to help managers pinpoint precisely which products, and which customers, are profitable and which aren’t. It’s a common-sense idea: The first step in fixing anything is seeing exactly where it’s broken.

Then there’s the little matter of how you pay your salespeople.

“If all revenues are not equally profitable, and some are not profitable at all, why do virtually all sales compensation systems treat all revenues as equally desirable?,” he asks, and then proceeds to explain how to encourage and reward the profitable sales you really want and phase out the less lucrative ones you don’t.

At companies that have tried out his system, Byrnes says, sales have jumped by as much as 35% and profits by 50% or more.

No question about it, the changes Byrnes recommends in Islands of Profit add up to a total overhaul of practices and assumptions that have lingered unexamined in some companies for decades, which is why he also throws in some shrewd advice about handling resistance to change.

A skittish economy, where he acknowledges that “the instinct is to hunker down and focus on short-term measures to minimize the pain,” may be the best moment to shake things up and get fit for a recovery.

“Like all things, hard times pass,” Byrnes writes, adding that “competitors who were frozen in the headlights and afraid to act decisively will fall further and further behind.”

Now, there’s something to look forward to.

© 2010 Cable News Network. A Time Warner Company ALL RIGHTS RESERVED.

Manage That RFP

The RFP process can be a big source of supplier frustration, or a critical point of competitive leverage. All too often, it is the former, but it doesn’t have to be that way.

Over the past few months, I’ve encountered two situations in which customers drafted RFPs that were not in their own best interest, and caused great difficulties for the suppliers.

The first concerned a distributor who had developed an extremely productive relationship with a major customer. The supplier had utilized its unique abilities to improve the customer’s production process. The results were stellar. What happened next? At contract renewal time, the customer’s purchasing group issued an RFP for the products without the related services, and made it clear that lowest price (not most value) would win the business.

The second situation concerned a major transportation and logistics company. Like the distributor, this company had developed very innovative services that greatly improved the customers’ ability to operate flexibly and efficiently, and to penetrate new markets. In our discussions, the company’s executives reflected that it didn’t seem to matter what they did for the customers because in the end, the RFPs were all about price.

The problem

The underlying problem in these situations is that there was a mismatch in the customer between the organizational unit that received the benefit, and the one that has to pay the bill. This is a common problem. As one top manager put it, his customers wanted to choose service from column A, and price from column B. His frustration stemmed from the fact that the customer did not frame its RFP to maximize its overall value, but instead each organizational unit within the customer acted in its own self interest.

This situation is not surprising, but it does leave supplier managers scratching their heads and wondering what to do about it.

Four steps in RFP management

In my experience, there are four essential steps in successfully managing your customers’ RFPs. The process requires coordinated activities over a significant period of time, so it is very important to select your target customers very carefully. You simply can’t actively manage all of your customers’ internal RFP processes.

Engage early and high. One of the biggest problems is that by the time a customer issues an onerous RFP, it is generally too late to change it. Instead, the first key to success is to begin the RFP management process well before contract renewal time.

At the same time, it is important to proactively choose your primary buyer within the customer. If purchasing controls the RFP, it is likely that price will be the main criterion. Instead, if you start the process early enough, you can develop relationships with those in the customer who own both the benefits and the costs. It is no surprise that a top executive of P&G said that in its relationship with Wal-Mart, the retailer’s CFO is P&G’s real customer. Consequently the P&G account team has a very strong group of finance managers – after all, P&G is driving sales by showing Wal-Mart’s top finance officers the overall value and profitability of the relationship.

Develop showcases. Even in the context of a well-specified customer relationship, a creative supplier has an opportunity to develop small, but important, showcase projects. A showcase project is an opportunity to “learn by doing” jointly with the customer on a small scale. These projects have very low cost and extremely low risk, but they are critical in developing and demonstrating new ways to do things. Because the innovations are actually functioning and observable, executives from throughout the customer can visit them and “kick the tires.” Showcase projects transform interesting theoretical possibilities into a real working models, and this process in turn has a major impact on executive expectations throughout the customer’s organization. It is only natural for these new expectations to become embodied in the next RFP.

Build alliances. While you develop an innovative service within a customer, it is important to be very proactive in partnering with your customer counterparts (those who are gaining the benefits) to build alliances throughout the customer’s organization. It is natural to simply assume that your good work and demonstrated value will carry the day. However, if your counterparts are not adept at advocating their interests, the RFP will be all about price.

Go public. When you create a valuable new service within a customer, take steps to encourage your counterparts to publicize the innovation. This can take place internally within the company in meetings, or even in internal newsletters and publications. You also can help your customer counterparts publicize your joint innovations in the local press as examples of the company’s vitality and ability to transform its business. In most situations, there are many important opportunities to publicize and market the innovation in concert with your counterparts, and these will have a major impact on subsequent RFPs.

RFP management

The benefits of capable RFP management are huge. If you help frame an RFP that uniquely fits your strengths and capabilities, you’ll build competitive differentiation and avoid commodity price wars. Most importantly, it will give you an opportunity to create real value for your customers, and to work with those customer managers who treasure real supplier innovation.

Success in the RFP process requires active management from day one. Those who settle into simply fulfilling the contract terms leave themselves open to price-oriented RFPs at renewal time. But companies that systematically manage the RFP process throughout the contract period control their own destiny.

The Profit Cycle: A Tale of One Business’s Turnaround

“Watch out for the bump in the road,” Grace blurted out.

Mike glanced down at the newly patched pothole, and braked his bicycle to a stop. Grace stopped beside him. Mike turned to her, “You know, I could take that two ways.”

Grace smiled. Mike had been her bicycling partner since college. In the distance, the Cambridge Reservoir presented a lovely early morning tableau. The maple trees were just turning blood red and yellow, and there was a slight mist rising from the water. “I thought your company was growing.”

Mike paused. “That’s the problem. Our revenues are rising, and our profits are falling. I’m working really hard, but it feels like I’m falling further and further behind.”

Grace visualized the changes she had managed over the past year as president of her distribution company. She understood Mike’s challenge – managing his fast-growing software company.

“I went through this last year, Mike. The good news is that you can grow your revenues and boost profitability at the same time.”

“I’d really like to hear about it. I’m pretty good at product development and selling. I thought we’d be profitable if I nailed these. I don’t know what else to do.”

Grace and Mike cycled over to a bench by the water, and Grace began to tell Mike about how she led her company’s profitability turnaround. Here’s her story:

Grace’s story

It all started about a year and a half ago. Grace was president of a $30 million distribution company that had the problem Mike’s company now faced: revenues were rising, and profits were falling. She was puzzled, so she went to a talk at MIT on profitability management.

The speaker outlined a four-step process for managing a profitability turnaround: (1) develop the right information, (2) institute the right priorities, (3) create the right processes, and (4) establish the right compensation.

Grace was surprised. The process seemed very straightforward and logical, but different from the way that she managed day-to-day operations and growth. She was also surprised that so many managers she met at the talk had the same problem – and reaction.

After the talk, Grace kept thinking about the speaker’s words at the end of the lecture. The first step is to develop the right information, which he called a “profit map,” which two managers could create in a month or two using standard desktop tools. “You’ll be amazed at what you see.”

This is the beginning of my new article, “The Profit Cycle: A Tale of One Business’s Turnaround,” which appears in FastCompany.com’s Leadership section. This article is based on my new book, Islands of Profit in a Sea of Red Ink. Here’s a link to my new article:

http://jlbyrnes.com/uploads/Main/The%20Profit%20Cycle.pdf>

How to Lead a Profitability Turnaround

Virtually every company is 30-40% unprofitable by any measure, while 20-30% provides all the reported profits and subsidizes the losses.

My new book, Islands of Profit in a Sea of Red Ink, explains why this happens to so many companies at this point in history, and tells managers how to fix it.

Many managers make the big mistake of assuming that a profitability turnaround must be a disruptive, one-time event. In fact, the most effective turnarounds are more like deciding to get healthy by eating better and getting regular exercise. When managed well, results come surprisingly quickly and the management team forms a culture of profitability that gets stronger and stronger.

A few weeks ago, I gave a talk and presentation to a group of top executives in Milwaukee at an event arranged by a terrific organization, 800CEOread. In the talk I highlighted some of the key points in my new book. Here’s a link to the presentation:

http://jlbyrnes.com/uploads/Main/Islands%20of%20Profit%20Presentation.pdf

How to Be Effective: Structuring Change, Managing Change, and Leading Change

When I talk to former students, clients, and executives, I’ve found that their biggest concern is being effective – going beyond conceiving great new things and actually driving them into practice.

I’ve also seen that most people make two big mistakes when they think about change:

  • They fail to realize that managing change requires a really different process from day-to-day management, not harder but very different.
  • They approach change in a one-size-fits-all way.

Successful change, being effective, involves three things: structuring change, managing change, and leading change. I call this The Golden Triangle of Change.

This is the beginning of my new article, “How to Be Effective,” which appears on the current edition of changethis.com. My new book, Islands of Profit in a Sea of Red Ink, which will be released this week, amplifies and details these themes in the section on Leading for Profit. Here’s a link to my new article:

http://changethis.com/manifesto/75.05.IslandOfProfit/pdf/75.05.IslandOfProfit.pdf