Improve Company bottom line through using Profit and Cost Management Analytical Applications
I have been responsible for implementing net profit and cost management solutions in a few companies and seen each one rapidly improve their bottom line first hand. Most companies know revenue, discount, COGs and some direct costs at customer and product level, but to complete the net profit picture they need realistic indirect costs such as overhead and service costs at this level too. These indirect costs include the costs of acquiring, supplying and supporting customers (cost-to-serve).
Why aren’t more Companies seeking to ensure they know indirect cost and therefore net profit at customer and product level and providing an analytical capability to enable improvement of their bottom line? Company decision makers can successfully improve net margin and reduce indirect costs radically by simply using a profit and cost management analytical application solution that enables visibility of margin, direct costs and all/most indirect costs across key dimensions including customer and product. With these solutions decision makers throughout an organization, can uncover tactical and strategic initiatives for net margin improvement at an exponentially increasing rate. These initiatives are uncovered through a process of discovery of cost anomalies and understanding why they occur through what if analysis to discover the size of opportunity and creating initiatives that improve the bottom line.
In current adverse economic conditions that drive companies to look for improvements in net margin and reduction in costs, enlightened companies should ensure they have such solutions. So why aren’t more companies doing it? For these enlightened companies this will mean a game change and huge competitive advantage over companies that don’t invest in the visibility and are therefore in the dark about the effect of initiatives on their bottom line.
So it’s a no brainer? Well yes because payback for these types of solutions is usually in months from implementation. What’s the catch? Well, to analyse indirect costs and identify cost drivers, companies are turning to solutions like SAP Profitability and Cost Management, an application that allows you to allocate costs to the lowest level (usually including customer and product level) by cause and effect methods and even activity based methods if required. The process of allocation requires some effort but there is no gain without some pain.
What stops companies from making such an obvious investment in business information? Sometimes companies don’t see using realistic indirect cost allocation to give true cost at the lowest level required, invariably these companies will be in the dark on which customers and products are profitable and often make decisions that improve revenue and gross profit that can adversely affect the bottom line. Others have had a bad experience or have heard of bad experiences in implementing Activity Based Cost allocations, however the improvements to the best activity based cost software (such as SAP Profitability and Cost Management) have taken away many of those difficulties. Sometimes the significant effort required to determine the best way to allocate costs is off putting but there is a lot of expertise by Industry group on how best to carry out the allocations. Any company that can implement a profit and cost management solution should be able to easily shave 5% off indirect cost in the 1st year. A 5% indirect cost saving in the 1st year for a $2B turnover company with $200M indirect cost means $10 million improvement in net margin.
So where are the low hanging fruit net profit improvement opportunities? There are huge net profit opportunities to be gained from employing such solutions to uncover customer net profit anomalies. With this solution capability companies can answer the question ‘Which of my customers are profit destroyers and which customers contribute most to net profit?’. Generally, when executives see this information they are shocked as often 20% of their customers are providing 80% of bottom line profit and invariably there are well over 10% of customers making a loss.
The Whalebone Curve or (Cliff Curve) illustrates (see below) a company’s profit through the customer contribution to cumulative profitability; on the left are the profit creators and then the break evens and then the profit destroyers. The lost profit is caused through the profit destroyers.
The particular whalebone curve above illustrates beautifully in a particular company how a few customers generate the majority of the bottom line profit, while many more customers destroy a big portion of potential profit (Lost Profit).
So what can one do with this information? By transforming the relationship with profit destroying customers and improving internal processes, companies can improve their bottom line dramatically reducing or removing lost profit. This can be achieved by showing decision makers where interactions with their customers are effective and efficient, and where improvements can be made through truly informed customer account negotiation with their customers. What analysis is useful? There are many types of useful analysis such as the Customer P&L extended to include all indirect costs by activity, causal analysis, benchmarking customer performance v the segment and much more.
I intend to release a new analytical application, SAP Customer Value Analysis, in the near future, providing role-based dashboards guided navigation and best practice analysis. It is intended for executive and management decision makers in sales, marketing, product management, operations (supply chain and manufacturing) as well as for finance. Unleashing the value of SAP Profitability and Cost Management indirect cost allocation combined with enriching transactional data, SAP Customer Value Analysis will deliver true net margin visibility and guidance to the business users.