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Finding Hidden Profits in Any Company

Island of Profit in Sea of Red Ink
Island of Profit in Sea of Red Ink

In the corporate world, MIT's Jonathan Byrnes is the go-to man for one reason: he can figure out where the profit is and where it isn't.

Byrnes, a consultant and lecturer at MIT has authored more than one hundred books, articles, cases, notes, and expert submissions.

For four years he wrote “The Bottom Line,” a highly-regarded Harvard Business School monthly column on managing profitability.

In short - he knows what he's talking about.

In a new book Byrnes says only about a quarter of most company's efforts are actually profitable.

The rest of the business is basically sucking you dry. Byrnes says roughly 40% of most businesses are unprofitable.

40 PER CENT!

In Islands of Profit in a Sea of Red Ink.and in his Guest Author Blog for Bullish Byrnes writes, "In almost every company – even leading ones:

  • 30-40% of the business is unprofitable by any measure;
  • 20-30% is so profitable it provides all the reported earnings and subsidizes the losses;
  • No one is responsible for managing profitability;
  • Even if everyone makes budget, the company will still have huge embedded unprofitability."

So how do you turn your business around? How do you protect and not kill your cash cow? How do you phase-out those customers, employees, projects and systems that are draining your profits?

In his book, Byrnes shares the three biggest mistakes managers make when trying to manage profitability and offers what he calls, the Four Building Blocks of Success.

Click ahead to read more in this Guest Blog from the author.

LEADING A PROFITABILITY TURNAROUND

GUEST AUTHOR BLOG: “Leading a Profitability Turnaround” by: Jonathan Byrnes, author of Islands of Profit in a Sea of Red Ink.

Astonishing but true:

In almost every company – even leading ones:

  • 30-40% of the business is unprofitable by any measure;
  • 20-30% is so profitable it provides all the reported earnings and subsidizes the losses;
  • No one is responsible for managing profitability;
  • Even if everyone makes budget, the company will still have huge embedded unprofitability.

Virtually all top managers agree, but they don’t know how to change it.

Island of Profit in Sea of Red Ink
Island of Profit in Sea of Red Ink

Profitability turnarounds are not particularly difficult, but they are very different from day-to-day management.

They generate cash from the start, and results come surprisingly quickly.

My new book, Islands of Profit in a Sea of Red Ink, gives you a systematic pathway to success.

It tells you how to develop the information you need, what to do, what resistance you’ll encounter, and how lead your whole management team to improve your results by 30-40% or more.

The book is based on 20 years of research and experience working with leading companies, large and small, in over a dozen industries ranging from distribution to telecom to financial services.

Three big mistakes

Managers make three big mistakes in trying to manage profitability: (1) assuming that more revenues means more profits; (2) failing to identify and focus on their profitable core of business; and (3) failing to develop appropriate information and processes to manage profitability.

Guest Author Blog
Guest Author Blog

These mistakes are a legacy of our transition from the previous Age of Mass Markets, which lasted most of the past century, to the current era, which I call the Age of Precision Markets.

In the prior “Age of Mass Markets,” companies sought economies of scale of mass production, coupled with mass distribution using arm’s length customer relationships. In that era, more revenues meant lower costs and more profits.

In today’s “Age of Precision Markets,” companies form different relationships with different sets of customers, each with different costs and profits. Yet, virtually all of our management information and processes were developed in the prior era, when all revenues really were equally desirable. This is why almost every company has so much embedded unprofitability and why so many managers fail to focus on their sustainably profitable core of business.

Four building blocks of success

Top management must put in place four building blocks in order to lead a profitability transformation.

  1. The right information. The book describes in detail “profit mapping” – how to develop much more granular information than that produced by accounting systems. You have to look at the profitability of specific products in specific customers. The book gives examples of how even profitable customers have 30-40% unprofitable business, which can be reversed with surprisingly simple measures. A couple of capable managers can develop a profit map for a multi-billion dollar company in 4-6 weeks using standard desktop tools.
  2. The right priorities. Don’t start by worrying about how to “fire” unprofitable customers! Instead, your first priority is to secure and grow your profitable business (before your competitors attack it); second, improve the marginal business, using your profit map to deploy sharply targeted measures; finally, explain to the remaining money-losers what they have to do to become viable customers (usually very simple changes that most customers are happy to make).
  3. The right processes. Mostly coordinating Sales, Marketing and Operations. Islands explains how to develop the highest impact processes: standardizing your customer offers; mapping your market to match your customers to the relationships they should have; developing your focus accounts (growing revenues by over 35% even in highly-penetrated customers by making them more profitable); and focusing product development on your core of profitable business.
  4. The right compensation. How to match compensation – especially for sales – to real profitability, not just revenues.

Management imperatives – transformational leadership

Many managers simply assume that leading a profitability turnaround requires a big, one-time, disruptive reorganization. This is a huge mistake.

In fact, the most effective turnarounds are more like deciding to get healthy by eating good food and getting regular exercise. The process is not difficult or painful, but it is a very different way of managing.

"Many managers simply assume that leading a profitability turnaround requires a big, one-time, disruptive reorganization. This is a huge mistake." -Author, Islands of Profit in a Sea of Red Ink, Jonathan Byrnes

What’s the first step? Develop a profit map – you’ll be amazed at what you’ll see.

The manager who puts the four building blocks in place – the right information, the right priorities, the right processes, and the right compensation – will create a powerful set of organizational dynamics that will change the company’s culture: managers throughout the company will naturally coordinate to improve profitability. The company’s performance will improve surprisingly quickly, and will keep getting better and better. All without disruptive change.

When you accomplish this, you will be providing true transformational leadership.

Islands of Profit in a Sea of Red Inkguides you step-by-step through this essential process.

READ AN EXCERPT FROM 'ISLAND OF PROFITS'


Adapted from Islands of Profit in a Sea of Red Ink by Jonathan Byrnes by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © 2010 by Jonathan Byrnes

"Revenues are Good, Costs are Bad" and Other Business Myths

Precise thinking and business discipline are essential for profitability and business success. Yet for too many managers in too many companies, "self-evident truths”—in truth, vague generalities—get in the way. Here are ten of the worst such business myths, each of which is fully addressed later in the book.

1. Revenues are good, costs are bad

This is the biggest myth of all. The truth is that some revenues are very profitable, and some are very unprofitable. If you use profit mapping to look carefully at the net profitability of virtually any company, twenty to thirty percent is profitable, thirty to forty percent unprofitable, and the remainder marginal. Islands of profit in a sea of red ink.

By focusing on average, or aggregate, profitability, you lose this essential fact, along with the opportunity to radically increase profitability at very little cost using sharply targeted measures. Because most sales compensation systems are based simply on revenues – and not all sales dollars are equally profitable (many are not profitable at all) - most companies are doomed to carry significant embedded unprofitability.

What about costs? If all revenues are viewed as equally desirable, it follows that all costs are uniformly bad. Thus, most cost reduction programs are broad and across the board. In fact, the very profitable portion of your business can and should support the extra expenditures needed to lock in and grow that segment of your business. But this is usually precluded because the unprofitable business absorbs unwarranted resources.

The worst danger is that competitors can identify and pick off your best business by focusing their resources very selectively.

2. We should give our customers what they want

This myth goes to the heart of how you define your business. You should give your customers what they need, which is often different from what they want. What your customers want is usually defined by their current way of doing business; what they need moves them forward and enables them to change and improve their business.

Your ability to move a customer to a new and better way of doing business will make you an essential strategic partner, not just a substitutable vendor. This is how you leapfrog your competitors, raise your sales and profits in your key accounts, and lock in lasting strategic advantage. You can discover real customer needs, and new ways to create value, by spending time with your customers and employing powerful tools like channel mapping (a process for assembling and analyzing an economic model of your extended supply chain, described in later chapters).

Often, a customer will not immediately see its real needs, and both lower-level purchasing people and your own sales reps can resist change if they feel that they are losing control when other managers get involved in the relationship. There are, however, effective measures that you can employ to sell and manage the change within the customer, including showcase projects that provide a working demonstration of both feasibility and benefits.

3. Sales reps should sell, Operations should fulfill orders

In transactional account relationships, where you are responding to one-off customer needs, this distinction holds true. But with your best customers, operations plays a critical role, both in the initial sale and on an ongoing basis. Important companies in industry after industry are reducing their supplier bases (number of suppliers) by forty to sixty percent. The suppliers that remain get huge market share increases, while others see big losses. The key factor that allows a supplier to remain is the ability to increase the customer's profitability on the supplier's products by employing vendor-managed inventory, product co-design, and other intercompany operating innovations. Here, the operations team is critical to successful account retention and revenue growth.

Adapted from Islands of Profit in a Sea of Red Ink by Jonathan Byrnes by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © 2010 by Jonathan Byrnes

Byrnes Jonathan
Byrnes Jonathan

Author’s Bio:

Jonathan Byrnes is Senior Lecturer at MIT, and author of Islands of Profit in a Sea of Red Ink (Portfolio, 2010).

He is an acknowledged authority on profit generation and profitability management.

He holds a doctorate from Harvard University.

To read more, visit the Islands of Profit book Web site.

Email me at bullishonbooks@cnbc.comAnd follow me on Twitter @BullishonBooks

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