The Toolkit for Increasing Profitability -...

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The Toolkit for Increasing Profitability (and Financial Effectiveness)

This white paper outlines the following: 1)  The 27 approaches for increasing business profitability and

organisational financial effectiveness, and 2)  Our method for prioritisation and implementation of these for

a given situation.

Contact e-mail: [email protected] Web: www.staffanengstrom.co.uk Tel: (01299) 890033

Copyright Staffan Engstrom 2014. All rights reserved 1




The Toolkit for Increasing Profitability

5. New markets

6. New products and services

7. InternaEonal

8. Mergers and AcquisiEons 9. CuJng out low margin business 10. Risk management/ Loser avoidance

Copyright Staffan Engstrom 2014. All rights reserved

11. Supply chain consolidaEon

12. Standardised cosEng models

13. Controllable cost reducEon

15. Lean 16. Kaizen 17. Six sigma

14. ProducEvity/ resource uElisaEon

Overheads

Costs of Sale

Profit

Sales

20. Zero-‐based budgeEng

19. Workspace consolidaEon

18. De-‐layering/ span of control

21. Asset ownership

3. Internal trading

2. Up-‐selling and cross-‐selling

1. Customer service

4. Make don’t buy

24. Shared services

26. Outsourcing

23. ICT consolidaEon 22. MarkeEng/ bid cost effecEveness

25. DiscreEonary cost

27. Offshoring

2




How to use the Toolkit


Purpose The Toolkit for Increasing Profitability is designed to help organisaEons to consider the approaches available to them for improving their financial performance and effecEveness. It is designed to be used in the following ways: 1.  As a check-‐list of the opEons available, to compare with iniEaEves already

in place, and to idenEfy ‘gaps’. 2.  As a baseline of the breadth of potenEal opportuniEes available, to allow a

targeted performance improvement programme to be prioriEsed, designed, and implemented. See slide 10.

Key Advice 1.  Don’t try to do everything at once. The key is to focus on the few

approaches that give the best returns. The rest can come later. 2.  Do invest the Eme into thinking about the iniEaEves and selecEng the right

ones for you. Less is more.

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Approaches for increasing profitability Service delivery focus


Descrip@on Key Considera@ons Result

1. Customer service Deliver for customers to get more of their business through: understanding key service criteria; embedding service ethos; measuring performance; following through on improvements.

Management commitment is key. Many programmes are nominal/ half-‐hearted.

Sales growth

2. Up-‐selling and cross-‐selling SystemaEc targeEng of current products and services to whole breadth of customers by enabling internal collaboraEon, and by tracking and following through on adjacent opportuniEes.

Ocen a big prize but must grasp internal teamwork required.

Sales growth

3. Internal trading Ensuring that exisEng internal service providers are used (where competent) over outside providers. In our view, internal trading is ocen best treated as ‘gross sales growth’, rather than as mere cost reducEon, to ensure that the customer service ethos is reinforced.

Internal trading fails when the internal customer is ‘is taken for granted’

Gross sales growth

4. Make don’t buy Analysis of the opportuniEes to convert exisEng supply into self delivery. Again, this is ocen best treated as ‘gross sales growth’ rather than cost reducEon, to maintain customer service ethos.

IdenEfy realisEc, profitable in-‐sourcing opEons vs. own skill/ delivery implicaEons.

Gross sales growth

4




Approaches for increasing profitability Organic expansion



5. Enter new markets Find new markets for exisEng products and services, through: idenEfying the ‘adjacent’ markets close to the core business; analysing them on the basis of ability to compete, margins, market growth, compeEEve intensity.

Can you compete effecEvely? CompeEtor response to your market entry.

Sales growth

6. Introduce new products and services Develop new products and services for exisEng markets/ customers through: deep analysis of customer adjacent needs, ability to compete, margins, market growth, compeEEve intensity.

Risk of non-‐delivery for exisEng customers. Can you compete effecEvely?

Sales growth

7. Interna@onal development Expand internaEonally with core products and services (ideally with exisEng customers first) through: assessment of potenEal internaEonal growth markets by country; desk-‐study and UKTI liaison for specific country working and entry issues; country visits for detail due-‐diligence to consider and determine best opportuniEes/ entry strategy, compeEEve posiEon, and partners.

Rigorous analysis of country opEons and and country due diligence. Risk of non-‐delivery for exisEng customers.

Sales growth

5




Approaches for increasing profitability Strategic and structural



8. Mergers and acquisi@ons Investment in exisEng companies to deliver: growth of capabiliEes, increased market share, wider geography, wider product and service range, larger customer poriolio, technology and IP, brand and track record.

AjracEve, ‘exciEng’ and ‘game-‐changing’ but risk assessment is crucial.

Sales growth

9. CuTng out low margin business Detailed examinaEon of product and service profitability together with core resource absorpEon (eg factory, people, plant etc) to remove and replace low margin business with high margin business.

Ability to actually replace low with high. Proper analysis of core resource absorpEon. Assess switchover risk.

Sales growth/ lowered costs.

10. Risk management/ Loser avoidance Balanced risk assessment to avoid unmanageable risks (NB: not the same as avoiding high risk!) e.g. PRIMACY for projects. Deep analysis of contract profitability to understand and manage work winning in the light of core competency.

Overcoming ‘in-‐built’ prejudices in the organisaEon. Key engagement tool in project business.

Sales growth /avoided cost.

6




Approaches for increasing profitability Costs of sale (mainly)



11. Supply chain consolida@on Deliver cost savings and service improvements though ‘bulk-‐buying’ and tying purchasing approach to supplier cost structures.

Balance of lower cost, customer service, & operaEonal efficiency.

Lowered costs of sale.

12. Standardised cost models SystemaEc analysis of opEmal cost structures (eg: staff structure for depots & sites) and rigorous implementaEon throughout business.

Standard model flexibility for varied situaEons.

Lowered costs.

13. Controllable cost reduc@on Deep focus on all the costs of that do not end up in the customer’s product or service, through analysis and systemaEc targeEng.

Allowing sufficient for customer service costs.


14. Produc@vity/ resource u@lisa@on Measure and manage uElisaEon of all material costs (property, plant, fee-‐earners etc.) to ensure best usage and cut spare capacity.

Measuring the right things.


15/16/17. Lean/ Kaizen/ Six sigma Lean: improving process speed and quality through reducEon of process wastes. Kaizen: conEnuous performance improvement. Six Sigma: managing quality of process outputs by removing the causes of defects in manufacturing and processes.

Repeatability of processes are key. ‘Culture change’ requires concerted efforts.


7




Approaches for increasing profitability Costs of sale and overheads



18. Delayering/ span of control ra@onalisa@on Manage reducEon of management layers and increased of spans of control through analysis of organisaEon (normally through exisEng HR systems). SubstanEal de-‐layering and cost saving can be achieved.

Reduced bureaucracy. & bejer customer responsiveness, vs disrupEon.

Lowered costs.

19. Workspace consolida@on Delivery of workspace consolidaEon opportuniEes through assessment of actual (vs. ideal?) need, uElisaEon of shared workspaces and ICT. Workspace management and property raEonalisaEon.

Balancing the ‘ideal’ needs of the business with the real costs.

Lowered costs.

20. Zero-‐based budge@ng JusEficaEon of all expenses starEng from a "zero base” rather than last year’s budget. It is surprising how ocen budgets are built on the basis of history, not the present/future.

Takes a lot of Eme, so focus on best opportuniEes and as a rolling process.

Lowered non-‐essenEal costs.

21. Asset ownership Acquiring rather than hiring or leasing assets, to support higher margin retenEon. Especially for the cash-‐rich!

IRR, ROCE, cash availability.

Lowered costs.

8




Approaches for increasing profitability Overheads (mainly)



22. Marke@ng/ sales and bid cost effec@veness More effecEve sales and growth investment through effecEveness analysis of sales force, markeEng cost and bid cost spending.

Early sales iniEaEves take Eme to bear fruit.

Lowered costs.

23. ICT consolida@on Standardise and consolidate ICT infrastructure: data centres, data lines, copiers, MFD, applicaEons, management.

Balancing desire for funcEonality versus simple effecEveness.

Lowered costs.

24. Shared services Centralise transacEonal Finance, HR, IT, pension management acEviEes. Applicable to wider services: markeEng, esEmaEng, supply chain management, R&D, call centres, fleet, maintenance etc.

TransacEonal services vs. wider applicaEon – ie cost and process vs. operaEonal flexibility.

Lowered costs.

25. Discre@onary spend management Pro-‐acEve management of spend on discreEonary areas: travel, accommodaEon, entertainment, agency and temporary staff.

Balance of waste with empowerment for real need.

Lowered costs.

26 & 27. Outsourcing/ Offshoring Outsourcing is reducing costs by transferring work to outside suppliers that can deliver more effecEvely. Offshoring is where outsourced business funcEons are done in another country.

DisrupEon to service delivery. Stability and language of off-‐shore locaEon.

Lowered costs.

9




ImplementaEon

Where to focus profitability improvement?


Size of the Prize -‐ £

Key considera@ons Key considera@ons

OrganisaEon appeEte for change

ImplementaEon difficulty

ImplicaEons for customer service

FragmentaEon of business acEviEes MulEplicity of

organisaEon layers Control/ autonomy

structure Scale of

administraEon Culture for internal

collaboraEon UElising assets &

resources

Cost of implementaEon

Opportunity cost – distracEng people

ImplicaEons for employees

ImplicaEons for suppliers

Define scope

Desk study of opEons

Determine key focus

Detailed review of key opEons

Pilot tesEng

Generate ideas

ImplementaEon planning

Detailed business cases

A tried and tested approach for priori@sa@on and implementa@on

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