"No problem can be solved from the same level of consciousness that created it."
- Albert Einstein
What these case studies have in common is we didn't simply gather more information - we looked at the issue in a new way, making intractable problems tractable.
1. Time to fire some customers?
The company was a mixture of a medical publisher and marketing consultancy, providing scientifically based marketing services to pharmaceutical companies - helping them develop marketing messages from their clinical data.
Projects seemed to take forever to complete and, however many people they had, it was never enough.
The obvious thing to do would have been to conclude that projects were run inefficiently; but instead we took a good look at the portfolio. The breakthrough came from looking at the way projects were priced and their profitability measured. This had been inherited from the company's parent, a publishing company, and just didn't work for this type of business. Specifically, it didn't take account of the staff time involved in delivering projects. For the old business this was not that much of an issue, but for the new business it was the single most important factor.
Using the new metrics, we found a tail end of projects soaking up 33% of the effort but only producing 12% of the profit.
The profitability of these was only one fifth of the average.
Further, we were able to see why some projects worked better than others. Where there was a very high scientific content the clients, who were marketing managers, respected the company's expertise and paid well. Where the project was more marketing oriented, they felt that they knew more. They paid less, and made endless revisions.
By applying the right metrics, being firm on pricing and giving priority to work with high scientific content, the company raised average profitability by 25% over 9 months, while continuing to grow revenues. In the end, it didn't have to fire any customers.
2. Improving cashflow
A software company was having difficulty meeting its forecast cashflow, causing concern to its bankers and venture capital backers.
The key was to take a fresh look at accountabilities. Historically, collections had been seen as the responsibility of the finance department whereas analysis soon showed that 80% of problems needed to be resolved by sales and operations. We established a system for tracking accountability.
To support the management of the new accountabilities, we created new management information which was both more timely (daily rather than monthly) and more specific, making clear who was responsible for what.
We also looked for ways to improve the contractual payment terms. Over time, payment terms for new licence sales had been stretched further and further from the ideal 100% on signature. We ascertained with sales staff that it would be possible to tighten the terms up. Modelling showed that this would benefit cashflow by 25% of forecast.
- Customers generally accepted the new, shorter payment terms
- Relationships between sales, operations and finance improved as accountabilities became clearer
- Overdue balances reduced by 30% over 4 months
- Overall, cashflow improved from 75% of forecast to 150
3. Improving Customer and product line profitability
in a static market
An IT services company had reached the point where further growth was difficult to find and profitability was adequate but no more.
The company had a software product and had built a wide range of other services around it; it licensed and supported the software, provided it on a bureau basis, provided customers with facilities management and other operations services from its 24-hour data centre.
To help it identify the path to profitable growth, it wanted to obtain a clear picture of profitability by type of service and by customer.
The situation was complex as costs in most departments supported several different lines of business. In close collaboration with staff from almost every department we pullled together or created the information needed for the first complete picture of profitability by line of business and customer.
The study produced a number of important results:
- Some very large customers were at best marginally profitable because of their heavy demands on support
- The most profitable lines were services which were straightforward to provide but depended on being able to operate over 24 hours. These offered much higher margins than licensing and supporting the software.
- Bespoke software development was being systematically underpriced by failing to allow for contingencies. This was easy to put right as these projects did not meet any price resistance.
Results were some important pointers towards growing profitability:
- Look for additional ancillary services based on 24-hour operations, as these offered excellent margins
- Review the operation of software support to reduce costs, at the same as increasing customer satisfaction
- Increase the pricing of bespoke software by 15-20% to reflect the cost of producing it, and the value to the customer.
Contact us to discuss how we can help your organisation achieve similar benefits.