Why True Profit™ Is Like Unmined Gold
The relentless pursuit of increased profit is every executive’s dream and nightmare. The motivators can change—shareholders, the stock markets, ownership, or even an executive’s compensation plan. Whatever the reason, for-profit companies are always looking for new and creative ways to increase profit.
To put it simply, there are only three ways to do that:
• Increasing revenue while maintaining costs.
• Maintaining revenue while decreasing costs.
• Increasing revenue and decreasing costs.
However, within those three ways, there are many different strategies that can be employed. This book will discuss the most effective of those strategies. However, here is a hint: the organizations that will have the most success are the ones that can best take advantage of opportunities. It is not about luck and good timing. It is about finding opportunities where you do not normally look—opportunities that will have an impact, and then maximizing that impact.
The first step is determining where the opportunities are and how much of an impact can be had. That means finding your True Profit and then realizing it.
What Is True Profit?
True Profit is a new way of thinking about your opportunities to increase profit. It is a concept that I developed to help my clients maximize profitability by finding opportunities that require little to no financial investment. All you need is some discipline, some creativity, and the drive to make improvements. Understanding your organization’s True Profit shows you how much money you are leaving on the table.
At one time or another, we have all said to ourselves, “I know there are opportunities to increase profitability and perform better; I just need to find and capitalize on those opportunities.” That is what finding your True Profit is. The key is not only identifying those opportunities, but also capitalizing on them.
True Profit is the difference between your organization’s current profit and what its potential profit could be. That potential profit is what I call True Profit. It is that profit you could be making if you were able to capitalize on opportunities. The way to realize your True Profit is by becoming a margin master—mastering the different profit margin levers and knowing when to pull which lever.
Where Is My Headlamp?
Have you ever thought to yourself, “I know there is a better way of doing this, but I am not sure where to start?” If you have, then you are like almost every other executive who wants to improve the bottom line of his or her business and organization. The challenge is finding the starting point, but more importantly, having the will to look in the deep, dark corners of your organization to find those opportunities.
We need our miner’s hat and headlamp to scour those deep, dark corners and shine a light on all of the opportunities in front of us. When was the last time you reviewed your customer complaints process, or the way you manage vendor contracts, or the way you handle product returns? There is nothing sexy about any of these operations, but I guarantee that you are leaving money on the table by not looking at them. Same as the way gold prospectors often needed to explore new and strange places, you need to explore the strange places in your organization.
Here are some areas of an organization that should have the light shined on them. Not because they often perform poorly, but because most organizations just look at them as a necessary department or function. They consider them repetitive activities or compliance functions that do not add much value to the organization’s bottom line.
Note: It should be noted that I use the word “compliance” very broadly in this book. I use it less to describe those departments in an organization that help it comply with government and other external regulations, and more to describe those departments that are tasked with policing the internal processes and policies that an organization has.
• Your procurement department
• Your claims department
• Your finance department
• The integration between your marketing and sales departments
• The collaboration between your sales and manufacturing areas
• Your HR department
• Your IT department
• Your supply chain
• Your customer-facing systems (online booking, website, and so on)
• Your customer service department
• Your call center
Later in the book, I will talk about why these areas, and others, are very important when trying to find your True Profit. However, here is a hint: because most organizations do not look there. They let these departments run themselves or consider them compliance areas that must adhere to strict rules and protocols. The organization looks down on them because they always seem to be getting in the way of accelerating the way the organization operates. They do not think of them as revenue-generating areas or being able to have a significant impact on the bottom line.
In consulting, we have coined the phrase “low-hanging fruit” to mean making changes and improvements that are easy and obvious. These changes can be made without much effort and can have a dramatic impact on the organization. However, once we have picked all of the low-hanging fruits, how do we reach the fruit that is higher up? The fruit that is harder to get to but will likely provide greater benefits. We need to come up with new ways to harvest that fruit.
Determining Your True Profit
As mentioned earlier, True Profit is the difference between your current profit and the profit you could be making if you were able to master the various profit margin levers (Figure 1.1).
Figure 1.1 True profit
So how can you determine your True Profit? Take this assessment to help you identify the key areas of opportunity.
The True Profit Assessment
Give each statement a score from 1 to 4 (based on the scoring legend), and then total them up for each profit lever (there are nine).
To calculate your True Profit, enter the score from the assessment for each lever. Add 0.5 percent for every lever where you scored less than nine, and 1 percent for every score less than six. Totaling these up provides your True Profit.
Your true profit is the minimum amount of additional profit you can achieve by implementing the right strategies in the right areas.
When I recently used this assessment with a client, they realized that, conservatively speaking, they could increase profit margins by at least 5 percent by changing some processes and implementing some new performance metrics. No new large investments were required. Just a better focus on making the changes in areas that they know will lead to more profit.
This organization, like many, knew that they had opportunities to improve financial performance. In addition, like many organizations, they struggled with identifying where the best opportunities were and how to take the first step. Once organizations take the first step, it is easier to take subsequent steps. In this case, the first step was taking the group performing some of the processes and activities that had been identified, and asking them for suggestions on what improvements could be made. My client was shocked at the number of great ideas that surfaced.
We then had to figure out which of the ideas to implement. We created a committee to review the ideas based on some common criteria that we developed (potential impact on the bottom line, ease of implementation, sustainability, and others), so that the best ideas bubbled to the surface. My client then put together a plan to maximize the results from those ideas, including who was accountable for the success or failure of the execution of the ideas, and how success would be measured.
Almost immediately, they were able to start making changes and saw a dramatic improvement within the first 6 months, with profit increasing by almost 5 percent in that time. We continued to roll this out across the organization and made additional changes that aligned with the direction my client wanted to go. The keys to success were spending the time to determine the best ideas and having the discipline to only implement a few ideas at a time.
Ryanair Rises Above the Clouds to Find Its True Profit
Ryanair is Europe’s biggest low-cost airline. It has always been criticized for its poor service and laissez-faire attitude toward customers who wanted anything more than a low-priced airfare. Michael O’Leary, who runs the airline, has even been known to criticize passengers for being “idiots.” But in late 2013, Ryanair refocused its business to attract new customers and retain more of its existing customers. Ryanair’s old model of service was to be the lowest cost provider, not lose customers’ baggage, and to have flights arrive on time. Everything else was ignored. Not exactly the textbook strategy for customer acquisition and retention.
By the end of 2013, Ryanair began to change its definition of customer service and change its culture toward one of customer focus. It eliminated many of the policies that were frustrating customers and allowed more carry-on baggage, reduced penalties, and allowed customers to book an assigned seat. One of the more visible ways it made changes was to overhaul the online booking system. It reduced the number of steps customers had to take from 17 to 5. Imagine the difference that would make if you were a customer. Imagine having to go through 17 different steps to book a simple flight.
Profits jumped by 32 percent in the first 6 months after these changes were made. Customer complaints went down by 40 percent, and the airline anticipates an annual profit that will be 45 percent higher from the previous year. They attracted 4 percent more passengers over the summer period. Those are some significant results.
So what will Ryanair do with all of this newfound profit? Invest it back in the business by buying 200 new planes with the goal of doubling the size of the company. Not bad for a company that only a year before had very little focus on customer service outside of being the lowest cost provider.
The following can be learned from what Ryanair has accomplished:
• Strategy is fluid and organizations need to be flexible and nimble enough to change quickly.
• There can be significant profit increases without making large capital investments. Many of the changes Ryanair made were to internal policies and procedures, and the behaviors of their people.
• Making additional profit allows an organization to reinvest in the business.
• Being the lowest cost provider of anything can only go so far. At some point, it becomes saturated and an organization needs to offer more to attract and retain customers.
• The most successful organizations have leaders who exhibit the behaviors they want others to exhibit. Michael O’Leary of Ryanair had to change his own approach to customer service before he could ask his employees to do so.
• Organizations need clarity in the direction they want to go and the tactics they employ must align with this. Eliminating policies and processes that were frustrating to customers went a long way in helping Ryanair change customer perception of the organization.
Home Depot Exhibits Do-It-Yourself Profit Improvement
The success of do-it-yourself home improvement giant Home Depot has always been tied to the housing market. When the housing market is booming and people are buying more houses, they want to upgrade their fixtures and invest more money in the new house. When the market is slow, fewer homes are being turned over, people invest less in new homes, and do-it-yourself projects tend to be smaller.
From 2011 to 2014, Home Depot’s profit margin increased from 6.74 percent to 8.61 percent (source: http://ycharts.com/companies/HD/profit_margin). That is more than a 25 percent increase in profit margins over 3 years. The financial analysts will tell you that it is because the housing market was hot, which led to higher customer traffic through Home Depot stores and an increase in same store sales. These things are true, but they do not tell the whole story and do not necessarily mean more profitability. During that same time period, Home Depot also took a huge reputational hit when data for thousands of customers were breached. Yet, still profits rose.
If it was not just the hot housing market, what did Home Depot do that allowed it to have such tremendous success?
• It adapted marketing efforts to suit the housing market. When the market was booming, it marketed bigger home improvement projects and when it slowed down, Home Depot marketed smaller projects.
• It slowed down global growth and expansion and focused more on maximizing results from the stores and people it already had invested in.
• Like Ryanair, it put more focus on the customer experience by updating stores to be more open and appealing, and encouraging staff to roam the stores looking for customers who needed help.
• It expanded into different product areas trying to increase brand awareness. You can now see the Home Depot logo on toys in children’s toys stores.
• It began offering free in-store workshops and seminars, teaching customers and prospective customers the best ways to complete certain do-it-yourself projects.
Essentially, Home Depot did a better job of leveraging the assets it already had and maximizing results from those assets, which were its people, its brand, and its locations. This led to an increase in the average sale size per customer and a better customer experience.
What We Learned?
True Profit is a concept that any organization can achieve. The following are the keys to success for your organization in order to realize its True Profit:
• Look for opportunities in areas you would not normally look.
• Figure out how to transform cost centers into profit centers.
• Turn compliance into revenue.
• Use common criteria to assess and compare different opportunities.
• Have the discipline to only select a small number of opportunities for implementation.
• Ensure one person is accountable for the success or failure of the implementation.
• Plan the activities and the metrics to be used to determine success and ensure they align with the direction the organization wants to go.
• Engage the people most impacted by the change early and often.
• Look for areas of your operation that can be improved, and take the first step.
• Convert sunk costs into assets.
These create the foundation for the Unified Theory of Profitability that will be introduced in Chapter 3.
Finding your organization’s True Profit does not always mean cutting costs or increasing revenues. It can often mean getting more out of what you have already invested in. It can mean finding opportunities in areas that you would not normally consider. It can mean removing obstacles that hinder profitability.