cover story
profitable, and you may actually be able to cut your prices and win some additional market share, in a very price-sensitive portion of the market, and so make money that way. “It’s about having that kind of detailed information
available to the managers, but they have to have the dis- cipline to collect the data, to report it themselves and meet periodically.”
Case in point He points to a company he has worked with, and whose experience he has captured. “They run on a six-month cycle for their products and their customers. So, in Q1 they review the P&L [profit and loss] of all their prod- ucts and then take some actions based on that. In Q2 they look at the data from the point of view of cus- tomers, and then take some actions based on the unprof- itable customers, and try to get closer to the profitable ones. Then in the third quarter they come back and review the products because now they’ve had six months’ additional work since they made the decision at the end of the first quarter. Finally, at the end of the fourth quarter they look back at the customer. “So they’re looking at six months’ worth of data on products and customers and just alternating the quar- ters, which gives them six months to see the impact of the actions that they’ve taken – first at the product level and then the next quarter at the customer level. “It’s just a very disciplined process that’s built into
their management system. It’s a fundamental way of looking at the products you’re producing and the cus- tomers that you’re serving.” The key, says Kaplan, is the continuous nature of the
process, and with today’s technologies there’s little excuse not to do this. “Take that company I’ve just described. They couldn’t have done this 20 or 25 years ago because they didn’t have the information available or accessible. After 20 years of companies investing in their ERP [enterprise resource planning] systems of various kinds, they have captured transaction-level data. “A lot of companies have not gotten much of a return on their investment in the ERP system. So having this
P&L calculation, it’s what’s going to give you the value of return from the data capture that you’ve invested in over the last 10 to 20 years.”
Cost-cutting no solution The companies that are not doing this often have little option but to cut costs when growth stops, but cutting costs is often not the solution, explains Kaplan. “If you’re not doing that measurement, then the only
information you have is your operating profit and loss data, so you are looking at what is really a horizontal view, how much we’re spending on costs, on selling expenses, on marketing expenses, distribution expenses and product development expenses. So you can go through the line items of your income statement and you start slashing at that level. “I think that’s really a mistake because some of that spending is supporting profitable products and prof- itable customers – if you’re slashing across the board like that, you do get rid of some excess fat or waste and inefficiency, but you’re also likely to start slashing into muscle and bone and compromising important products and not serving important and profitable customers. Rather than taking that ‘horizontal’ look, Kaplan
advocates a different approach. “Take a vertical look. For every customer, look at the net price you’re getting from them. Many companies don’t know the net price for transactions because there are so many promotions and allowances and discounts that get taken and that are authorised by different parts of the organisation. That can be sales incentives, some of it is the marketing or advertising allowance, sometimes it’s the financial department giving a discount for prompt payment. “So you have this myriad of discounts, promotions and
allowances which we know in an aggregate financial statement will say: ‘This is how much we’re dropping from total revenue through all these special deals’, but you don’t know it by transaction or by customer.” Look instead at all the discounts and allowances cus-
tomer by customer, urges Kaplan. “Then you look down at the cost associated with each customer, how much selling expense, how much distribution expense, how
16 Irish Director Winter 2010
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