Strategic Insights # 10
HOW TO GET A BETTER RETURN ON “ANALYTICS”
“Analytics solutions” for distributors
first appeared in the late ‘90s. Ten to fifteen years later, many distributors
are long on information and short on ROI. So are many big firms in many
industries. Major league sports teams, for example, have been investing in statistical
performance theories since the late ‘80s. The first ROI breakthroughs occurred in
the NFL, then baseball (recounted in “Moneyball” in
‘03) and more recently the NBA.
What should we do differently to get serious results?
GUIDELINES FOR SUCCEEDING
WITH ANALYTICS SOFTWARE
First, don’t believe the “solution” advertising; software is only a tool. Leaders have to: ask the
right questions; pursue strategically-guided theories; find unique insights;
execute good experiments well; and scale the winners.
(2) Make sure that you have at least five, pre-requisite factors that must
exist within a company and be in supportive alignment with analytics tools to
get great results.
Analytics software, by
itself, can only crunch easily available financial numbers. Because financial
numbers are symptoms of underlying root causes for profitable and unprofitable
line item activity, (3) crunching symptomatic
data won’t lead to profitable insights.
What is insightful is to (4) explore your firm’s “historic
strategy”, which I define as the intersection of most net-profitable items (not
ones with high margin percent markups!) being bought by most net-profitable
customers.
To do this (5) a distributor must develop their own
“cost-to-serve” model that yields “accurate-enough” net profit/loss
increments for every line item processed and more. It’s easier than it sounds,
especially with outsourced assistance.
(6) Doing root-cause analysis on the extremely
profitable and unprofitable – customers, items, suppliers-hiding within your
averaged-out financial numbers will provide powerful insights. But, then be prepared to (7) practice “change management” judo on four big cultural resistance barriers
that all firms will have.
JONATHAN BYRNES’ FOUR
CULTURAL BARRIERS + ANTIDOTES
Byrnes authored the
must-read: “Islands of Profit in a Sea of Red Ink”. He has identified four
barriers within companies that keep them from getting results with customer/item
profitability insights. They are (with some of my comments):
1.
Accounting
Systems. Accounting systems and financial management
have nothing to do with inter-business, process: costs; service value effectiveness;
and profitability. We must continue to use GAAP-based accounting to: pay taxes
on time and get a clean audit to borrow money from banks. But, we must also create
new, complimentary, parallel reporting for creating and selling “precision
supply chain solutions” (Byrnes term) profitably.
2.
Sales
Compensation. If reps are
paid to get any sales and/or margin dollar volume, they will get the
unprofitable-to-serve volume too. (And, it is easiest to get!) They will also resist
policies that make it harder to win more margin dollars like: prompt payment;
fees for services; not stocking special items customers might buy; etc. If
reps are switched to a competitive salary with an incentive based on
net-profitability of customers after all costs-to-serve are included, they
change quickly. Instead of “price”, they rapidly expand the negotiation to all
buy-sell, supply chain activity savings on both sides, which is what a “VP of
Supply Chain” wants. But, can both management and sales reps give up the
100-year old belief (now outdated) that more sales volume and margin will yield
economies of scale profitability?
3.
Lack of
Focus On the Profitable Core. If selling any product to any customer is rewarded
regardless of cost-to-serve, then a firm will be distracted from:
a.
Getting a bigger
share of their more profitable core.
b.
Not letting bottom
80% reps sit on key-account, net-profit potential.
c.
Seeing and
transforming pockets of lose-lose channel costs to win-win relationships.
d.
(Typically)
doubling their sales with fewer, better active accounts and quadrupling profits.
4.
Inability
to Measurably “Prove It”. The
notions that a distributor can tweak processes with both existing
super-profitable and unprofitable accounts and:
a.
Dramatically
improve perceived service value in the customer’s mind;
b.
Capture another
20 (to 1500% in a personal case of mine) in sales volume;
c.
While lowering
total cost to serve by 20% are…
d.
All not provable
with historic data and mindsets until they are achieved.
Our borrow-and-spend,
sugar-high recovery is over. Where are we going to find new profitable growth
opportunities? For case studies on how distributors are mining these new
sources of service value and profits with the right analytics and change
management techniques, contact me about attending the October, Waypoint
Analytics -sponsored, “Advanced Profit Improvement Conference” in Chicago.
bruce@merrifield.com
