cover story
‘Once you see the drivers of the loss, there’s a set of actions that the managers can take that will enable you to transform unprofitable products and customers into profitable ones’
much packaging expense. That’s a vertical look. “If you have 5,000 customers you’ll have 5,000 P&Ls,
each one of which looks like a full income statement. But that’s actionable because you’ll find that 1,000 of those P&Ls are good, profitable, 3,000 or so are breaking even, and then you’ll have 500 customers where you’re losing a lot of money and you’ll be able to see where it is – too much discounting, too much special packaging, too much customised delivery? But now it’s actionable, to reduce these through some negotiations with the customer.” Again he refers back to his case study. “In that com-
pany, the costing study was led by the vice-president of sales who knew that they had difficult unprofitable cus- tomers and he said: ‘I’m prepared to have difficult dis- cussions with those customers but first I have to be sure what the facts are. I have to know how much discount- ing we’re doing with the customer, how much the cost is of special handling and delivery. Our current costing system doesn’t give me that’. “So, he insisted that they get to an accurate cost sys-
tem and then he would use that in his discussions with the customers,” continues Kaplan. “I was just at a con- ference where the chief financial officer of the company gave a report – this was a year and a half after I finished the case – and he said the company had picked up 10 percentage points of operating margins in the last year just through these discussions they have about their products and our features and the customer relation- ships. That’s huge.”
Negotiate with the customer Kaplan is not suggesting you fire the unprofitable cus- tomers. “Firing the customer is the last thing you want to do. You may have to if everything else fails because you can’t continue to lose money, but you find that once you see the data, there’s a set of actions you can take.” Going back to the case study, he says one customer
was the second largest loss customer at that company. “I know it was at least 10pc of sales on a very high revenue base, and in six months it became their fifth most prof- itable customer. It was not just one thing but a series of changes in the relationship, including pricing, being
careful about the discounting policies, etc.” “You can take a very large loss customer in this case,
and a customer much larger than the company, and make it into a profitable one. Because in general the cus- tomer doesn’t want to be fired. But it’s not their respon- sibility to make sure that you’re profitable! That’s your responsibility.”
Leadership is the key Leadership is essential here, says Kaplan. “Everybody in the company has a job and they’re doing the job they’re told to do within the framework they’re operating, but it’s up to the leader to look outside, to look at the com- petitive environment, the competitors and where are they going, and who are the customers that can be reached. The leader, with the support of the executive team, has to devise that strategy that enables you to compete.” Irish companies need to do this in an ever more com-
petitive landscape where competing on cost is no longer a differentiator, advises Kaplan. “If leadership is just staying with the existing product line and the existing customer base, if it isn’t doing the things I was describ- ing, like fine tuning the product line, or fine tuning how you work with customers, if they don’t have a really coherent strategy for competitive sustainable advantage, over time whatever advantage they have will be eroded. “So we do look for leadership to position the company
favourably in a competitive environment, and to choose a strategy that looks like it gives some advantage in the marketplace, then communicate that to all the people, and implement it extremely well. And one of the tools for implementing this very well is the feedback you get from the activity-based costing and profit model of products and customers.” Irish businesses need to be looking at differentiation
and innovation in their products and services, concludes Kaplan. “Otherwise, over time you’ll be competing in a commodity space. And you can do that – Imean Ryanair does it,Walmart does it – but then you have to be ruth- less about your cost position because only the lowest cost will survive with that type of strategy.”
Winter 2010 Irish Director 17
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