Creating Value in a Down Economy

Key Thought:

The dominant topic in conversation these days is who got laid off.  As usual, the book titles in the book shop has adjusted accordingly too. There are a lot of opportunistic penmanship out there, but I did come across a very relevant, practical and solid write up.  It's about customer profitability.

Is there a way to improve profit without increase revenue or laying off staff? Apparently there is.  Read on...

Summary:

Quotes:

- Potentially, 400 percent of the figures listed on your profit-and-loss statement could be recovered as profit

- ...best 20 percent of customers contribute profits equal to 500 percent of earned income, while 60 percent breakeven at best; the worst 20 percent destroy 400 percent of earned income.

- ...if market segmentation analysis relies on incorrect information about profitability, efforts to grow sales could be directed toward the 20 percent of customers that are unprofitable.  In reality, these efforts will accelerate the destruction of profit.

The article helpfully define what Activity-Based Management (ABM) is.  It's not a financial system, it's an organizational cost-and-profit-analysis too.  It attributes costs to processes, and process costs to the products and services that benefit, and ultimately to the customers that receive those benefits.  ABM pinpoints, in a highly understandable way, the top areas for action and the changes that will maximize profits and minimize costs.

ABM can be used to resolve budget constraints, fight price wars, re-engineer processes, consolidate overlapping organizations, optimize customer acquisition and retention, reduce unused capacity.

Top 3 barriers to adoption of ABM:

1. Failure to convince management that change is needed. Resolution requires leadership, communication, learning and the ability to build a broad-based coalition of the willing.

2. Failure to define a clear business purpose for ABM.

3. Failure to plan for and capture a significant ROI. If the business purpose of ABM is to change decisions for the better, it should be possible to anticipate where the returns will be.  And, once the system is in place, you should be able to compute the returns from the resulting decisions.

Often, the ROOT CAUSE of barriers to adoption is lack of knowledge about ABM. So to start, we must build a coalition of the willing in order to get ABM adopted in our organization.

Additional input from SAS blogs:

- champion from Finance/Accounting is needed

- start focused and small

- firms have to be aware of the necessity to track...how much to spend on each customer to retain them as profitable customers

- the company with the best cost information wins

My Comments:

It is in our mid-term plan to implement ABM.  This is the first shot in our quest to get ready for this.  We should take heed of the last paragraph, let's learn as much as we can about the theory, the tools and the lessons learned from those who have done it, then we start.

Two links to SAS website provides more information.

www.sas.com/sascom-profitablecustomers

www.sas.com/sascom-abmtour

Reference: Creating Value in a down economy: want to turn losses into profits? identify your most - and least - valuable customers, Interview with Peter Turney, CEO of Cost Technology, by Jonathan Hornby, SASCOM magazine, First Quarter 2009.