Finding Common Ground Between the CFO and COO – Part 4

[Continued from Part 3]

The Banking Trade

Our next example of how businesses might leverage business intelligence (BI) to segment their markets and thus allow them to increase throughput in significant ways comes from the banking industry. In this case, a bank creates a data bridge between a legacy database and databases maintained by its departments. The new application gives branch managers and other users access to business intelligence to determine who their most profitable customers were and which customers might be above-average targets for cross-selling new products.

Implementing these new tools liberated the IT staff from the task of generating special analytical reports for the departments and gave department personnel relatively autonomous access to a far richer source of customer-related data.

However, the bank need not stop with “cross-selling.” Consider that if the bank has information on “the most profitable customers,” they could dig deeper to determine the geographic and demographic corollaries among their “most profitable customers.” Uncovering and analyzing these corollaries employed in conjunction with a simultaneous thrust to unlock what the bank’s employees know—that is, tribal knowledge—might help the bank develop carefully targeted irrefusable offers. Such offers would undoubtedly allow the bank to

• Sell more existing products and services to new customers
• Create new offers that will attract new customers from the “most profitable” demographic and geographic market segments
• Create new offers that may interest existing customers and make offers that may be even more profitable for the bank

 

Your Business

Regardless of your industry, it is highly likely that a joint effort made by the CFO and the COO to unlock and join two valuable sources of data will lead to many valuable ideas for increasing throughput. Those two sources of data are

• What is available through (formal or informal) business intelligence about your customers
  
  with
• What is available—but probably undocumented and poorly understood—in the minds of your managers and employees in the form of tribal knowledge.

For this reason, I strongly suggest that for most SMEs (small-to-mid-sized business enterprises) the very first place to look at rapid ROI from business intelligence is to be found in market segmentation.

Understanding Your Customers’ World

One of the errors made by CFOs and COOs in most organizations use a definition of “quality” that is totally objective. After all, how else could or should the firm measure it? Most use a definition along the lines of “without defect” or “within tolerances” or “meeting or exceeding specifications.”

Toyota, however—the firm that came from behind to become a dominating automobile and light-truck manufacturer throughout the world—has learned and predicates it operations on an entirely different definition of quality. Toyota’s measure of quality is:

Does the product make the customer’s experience and results better or not?

Toyota’s concept of quality originated from concepts introduced to Japan in the 1950s by W. Edwards Deming. It was Deming who said:

“Constantly improve the design of product and service. This obligation never ceases. The consumer is the most important part of the production line.”

As a result, Toyota’s measure of quality takes into account, not just what the customer buys, but also:

• Who buys the product: Because the who will lead to different expectations and different feelings about the experience and the results expectations.
• When the product is purchased: Because the circumstances leading to the purchase of the vehicle will also contribute significantly to defining the experience and the results expectations of the buyer.
• Why the product is selected: Because the why is another significant contributing factor to the buyer’s experience and to defining the buyer’s expected results.
• Where the product is purchased: Sometimes product purchases are driven by regional factors (e.g., climate, urban versus rural or back-woods). These factors will affect the buyer’s experience and results expectations.
• How the transaction is structured: The economic construct of the transaction may include multiple factors such as the duration of the warranty, the payment terms, the time of delivery or lead-time, and more. These factors also influence the buyer’s experience and the sense of results.

Segmenting the market requires the whole supply chain to understand the customer because, fact of the matter is, No one in the supply chain has made a sale until the end-user has made a purchase. This is why both the CFO and COO should seek first to understand their customers. Next they should seek to segment their market—because different customers buy under differing circumstances and for different reasons.

These actions should lead to a plan for the creation of irrefusable offers which should, in turn, lead to rapid ROI.

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 3

[Continued from Part 2]

The concept of market segmentation—segmented down to a single customer, if necessary—has been driven to a large extent by consumers empowered by the Internet. (Here I use the term “consumer” in the broadest sense. In a supply chain, the “consumer” may be a company or even a buyer within a company in the supply chain.)

Consumers no longer need to be satisfied with what is available to them locally, regionally or even nationally. Instead, a buyer has virtually direct access to a whole world of manufacturers, wholesalers, distributors, brokers and retailers offering a huge array of products, services, delivery methods and terms of service.

Many product offerings are configurable via the seller’s Web site to meet specific requirements or tastes. Too, frequently, the various sellers are willing to offer the products via custom-tailored terms, conditions, and delivery methods. We refer to this combination of product plus related delivery terms and options as the “augmented product” of the “offer.”

Employing Business Intelligence (BI) to Segment Your Market

Business intelligence—regardless of whether it is done with specific BI tools, or just by leveraging the native capabilities of Microsoft® Excel™—can help an business better understand who buys what from the firm, and why. Here are some examples:

Hospitality Industry

A hotel franchise uses BI analytical applications to compile statistics on average occupancy and average room rates to determine revenue generated per room. It also gathers statistics on market share and data from customer surveys from each hotel to determine its competitive position in various markets. Such trends can be analyzed year-by-year, month-by-month or day-by-day, thus giving the corporation a clearer picture of how each individual property is faring.

If these data were extended to include related matters such as

• Business versus pleasure occupancies
• Local event calendars by postal codes
• Other potentially influencing factors

Then the hotel chain could begin to discover who uses their services under what circumstances and, perhaps, why their customers chose their hotels over the chain’s competitors. With this information in hand, the chain would be in an increasingly better position to construct “offers”—preferably irrefusable offers—to their clientele (or prospects) based on dates, reasons for travel, and more.

Take for example a hotel where the occupancy rate is typically below 50 percent on Sundays through Wednesdays. How much time would it take to discover businesses in the region that bring in folks regularly for training, small group conferences or other business purposes during the week.

Having identified these business organizations, making them customized offerings would make sense. For some businesses and business purposes, a discount of 35 percent off the nightly rate might be sufficient to garner the business. For others, a steeper discount might be necessary because the folks to attend their events are typically paying out of their own pockets. So, offer them a flat rate of $69 per night and throw in a free shuttle to and from the airport and to and from the conference sessions.

Since the hotels truly variable cost (TVC) for filling an additional room or ten rooms is very small, almost every additional dollar of revenue gained through such offers will fall directly to the bottom line of the business.

Let us assume that (to make the math easy) a hotel typically rents its rooms for $200 per night (annual average). This hotel’s business intelligence analysis shows that Sundays through Wednesdays during the months of January through April, they are going to have an average of 50 empty (in-service) rooms per night. If this hotel can construct a compelling offer that will fill just half of those rooms (25 rooms) at $70 per night, that would be about 1,733 nights at $70, or $121,310 in additional revenues annually.

If we assume that the truly variable cost (TVC) per additional room per night is $10, then we must subtract $17,330 from this figure to get our throughput of $103,980. That is more than $100,000 in increased annual revenues even though the rooms are being let at far below the “going rate” via the irrefusable offer.

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 2

[Continued from Part 1]

I do not believe there is any doubt about it. Cutting costs takes far less real and deep thinking than it takes to come to understand your marketplace better. Both the CFO and the COO can agree that cutting costs saved them money—even if the unspoken side-effect of the cost-cutting action was to also reduce revenues through lost sales, lost customers or both. (Of course, in really hard times, the CFO and COO can console themselves by saying, “Sales probably would be down anyway,” and thus ignore the damage done through cost-cutting.)

Making your move

Most firms—even with brilliant CFOs and COOs—are not going to make one giant step from “failing” to “leading.” It is far more likely that they will take incremental steps. So, let us now look at each of these quadrants in more detail.

Failing

The failing firms are those that are both ineffective at increasing Throughput and are also undifferentiated in the marketplace. These are the “also-ran” firms in which management has been unable to produce enough throughput to sustain profitability.

Throughput leads to profitability via this formula:

Profit = Throughput – Operating Expenses (OE)

Recalling the definition (see Part 1) of Throughput, and substituting, we get this:

Profit = Revenues – Truly Variable Costs (TVC) – Operating Expenses (OE)

Of course, the ineffectiveness in producing profits is also linked directly to management’s other failure: the failure to differentiate itself in the market. It is far more challenging to produce a profit when all you have to offer is a “commodity”—a product or service that is so generic as to make “price” the sole differentiator.

Risking

Risking firms are sometimes “bleeding-edge” companies. These firms have found ways to differentiate themselves, but have not yet discovered how to make a profit while doing so. Their differentiation leads to demand, but the demand just adds more risk because they are losing a bit on every unit while trying to make up the difference in volume.

Competing

The competing firms are also stuck dealing mostly with “commodities.” They find themselves competing based on price more than almost any other factor—due to their lack of differentiation in the marketplace. The good news is that their management has learned how to be effective at producing a profit, at least.

Some firms are very comfortable in this role. They do not seek market leadership. If they are, then all of their profit must be predicated on business volume. They are generally hurt by significant economic downturns that kill sales volume.

Leading

The largest rewards (on a per-unit basis) are reserved for “leading” firms. Companies in this quadrant have both differentiated themselves in their markets and their management has proven itself effective at producing and increasing throughput.

Even as overall markets shrink, it is possible for such leading firms to prevail by taking a larger and larger share of the shrinking market. While sinking or shrinking companies are giving up market share, prevailing or leading companies can grow by taking over what is surrendered by vanishing firms.

Increasing breadth of market

In 2006, Chris Anderson, a former journalist at The Economist and editor of Wired magazine, published a book entitled The Long Tail: Why the Future of Business is Selling Less of More. The term “the long tail” comes from the appearance of a sales graph where lots of products (x-axis) are sold in smaller quantities (y-axis) into lots of different market segments. This book talks about the why behind the product proliferation we are seeing in many, many markets.

Although I am not a smoker, when I was a young man a recall that there were only a couple dozen cigarette brands sold in the U.S. Today, the tobacco industry has proliferated cigarette branding to perhaps a hundred varieties or more. Similarly, when I was younger, there were a few dozen major soft drinks: Coke, Pepsi, Mountain Dew, and so forth. Today, that has exploded into almost a dozen varieties of Coca-cola, alone.

In the 1950s and into the early 1970s, automobile makers produced a fairly limited range of options available for U.S. made cars. Many cars were sold out of the showroom or out of dealer inventory simply because they had a model in stock with all the options a particular customer might want.

Today, however, the number and variety of options available for U.S. made cars has grown to the point that one automaker claims that “no two cars delivered” are identical—even if they are inventoried by the dealer and sold out of dealer stock. Choices in colors, sound systems, trim kits, accessory “packages,” engines, seating, and more have led to satisfying “markets of one.”

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 1

It seems as though many organizations are at war within. During boom-times, the war is more subdued, but is still there. But in tough—really tough—economic times the war is more evident than ever.

What is that war?

The war is that age-old dispute between meeting customer service level demands and holding inventory levels within reason. In really tough times, keeping inventory levels down becomes even more critical to the CFO—and the organization’s survival, perhaps—because cash held in inventory for long periods of time puts a real crunch in the vital cash-flow of the firm.

Now, it is likely that the COO will surrender in times like these. He or she will understand that (too frequently) it really is a matter of survival to maintain the cash-flow. So, the COO might say something like:

“Okay. I get it. I’ll reduce inventories as much as I can. But don’t blame me if we can ship orders or keep our customers happy.”

What are your options?

Some have put it this way: In tough economic times you firm is going to

1. Sink,
2. Shrink, or
3. Prevail.

I prefer to put that into four categories. Furthermore, I do not believe that those four categories are applicable only in tough times. I believe that they are fully applicable to every business enterprise all of the time. Here they are shown in the figure below: 1) failing, 2) risking, 3) competing or 4) leading.

I believe the determining factors in every business enterprise are inherently simple and are only two in number:

1. Effectiveness – The measure of how effectively the firm employs the monies invested and how effectively does it spends its working capital in the process of turning inventory (or services) into throughput? This is a measure of managements effectiveness in managing its internal workings and the inbound side of the supply chain.
   
2. Differentiation – This is the measure of effective management is in dealing externally in the outbound side of the supply chain. This measure covers everything from R&D (research and development) through to marketing, sales and customer service.

The problem with these two terms (i.e., effectiveness and differentiation) is not that they are hard to grasp. Everyone seems to know in a very general way that they need to manage the firm to be effective in using its resources and that, in order to be profitable, they need to differentiate themselves in the marketplace.The problem is that many people seem to have difficulty these two words into concrete and effective actions.

So, let me restate the same figure using a different set of terms.

Note that I have redefined the two factors as follows:

1. Effectiveness = Increasing Throughput
   
   and
   
2. Differentiation = Breadth of Market through Irrefusable Offers

But, in dealing with my clients, I go beyond that. I use Eliyahu Goldratt’s definition of throughput:

Throughput (T) = Revenues – Truly Variable Costs (TVC)

Now, simplicity is at the root of this whole approach.

I know the CFO needs to do certain things to satisfy other executives, the bank, investors, and others. I know he needs to do some relatively complex allocations of operating expenses to costs for various reasons.

But, the COO needs to have a way to tell his people—from sales to shipping—how to easily differentiate good actions from bad actions. And, those fancy allocations just get in the way—muddying up the waters—when it comes to decision-making in operations.

We will take a look at that relatively simple equation for throughput again. But before we do, we need to define another term: TVC.

Truly Variable Costs (TVC) are limited to those costs that vary in an absolute way with incremental changes in revenues. Typically, TVCs are limited to a few categories:

1. Raw materials
2. Contract labor or outside services paid for on a piece-rate or batch-rate
3. Commissions

You will note that so-called “direct labor” is not a part of TVCs. Here’s why: If your company sells, on average, 100,000 widgets a month, does your labor actually vary if, in month one you sell only 80,000 widgets and in month two you sell 130,000 widgets? In month one was your labor bill on 80 percent of “average,” and was it 130 percent of “average” in month three?

Probably not. Labor is an operating expense that does not vary directly with changes in revenues.

Given that premise for TVCs and going back to our formula, there are really only three (3) ways to increase throughput:

1. Increase revenues
2. Decrease TVCs
3. Increase revenues and decrease TVCs

Meanwhile, back at the war…

One of the problems with (the many times unspoken) “war” between the CFO and the COO is that when they do reach common ground, it is all too often found only in “cost-cutting” rather than looking at ways to increase revenues.

The reason for this leap to common ground, of course, is made most clear by my first figure: typically, both the CFO and the COO feel more prepared and confident in dealing with the internal operations than with all the nebulous factors that lie outside the organization. So, dealing with internal effectiveness trumps trying to achieve higher levels of market differentiation—especially in challenging times.

[To be continued…]

Herding vendors, customers and the rest of your supply chain

Not long ago I had an opportunity to watch Temple Grandin, a 2010 biopic directed by Mick Jackson and starring Claire Danes as Temple Grandin, a woman with autism who revolutionized practices for the humane handling of livestock on cattle ranches and slaughterhouses. This is an outstanding film that shows how one autistic woman, through loving support and sheer willpower, has brought much needed change to an industry.

But I think what Temple Grandin brought to cattle-handling has much broader implications. When pitching her revolutionary—and seemingly costly—design for cattle-handling facilities at the first slaughterhouse, she was roundly criticized because the managers and executives say only the cost of building the system. Only through her keen insight and persistence was she able to get them to see that every day they were pay higher costs by not using a system like the one she had designed.

It’s all about flow

Grandin’s vision was simple (see: inherent simplicity). She boldly suggested that the industry will make more money by understanding and working with the cattle than by failing to understand them and constantly struggling against them. Her facilities’ design simply leveraged the natural tendencies of the cattle themselves to keep them cool, calm and collected as they moved through the operations.

She properly pointed out how very costly it was to pay large numbers of cattle-handlers to be constantly poking and prodding the cattle through the chutes. Not to mention the lost time, lost productivity, and damage done when the anxious movements of the cattle led to backups, herd-busting breakouts, or animals with broken legs that required heavy equipment to get them out of the way.

Grandin was all about “flow” and how an unperturbed flow would increase both production and profitability.

Lessons learned

I don’t want to take anything away from the best reasons to watch this wonder film: Temple Grandin. The best reason to watch this film is, of course, because it is such a wonderful story about overcoming adversity and achieving something when it seems that all the odds are stacked against you.

Nevertheless, I think there is a huge message here for business—and the supply chain.

Why do we hire so many “cattle-handlers” and spend so much time, energy and money poking and prodding our customers, our vendors, and—yes—our employees trying to get them to move along a little faster? Why do we spend so much of our time, energy and resources trying to get the flow moving again when our vendors or employees just don’t seem to “act right”? Why is it our all too frequent first response to problems with our supply chain—from one end to the other—is, “We need to hire more ‘handlers’ to keep the flow moving”?

Don’t we have enough “handlers”? Don’t more “handlers” just keep adding to our operating expenses and make it just that much harder to turn a profit?

Isn’t it time that we took time to really understand what motivates, demotivates or even stampedes our customers, our vendors and our employees?

What we’re looking for is “flow” that doesn’t require so much poking and prodding. The way to get is to work with those who must contribute to the flow. Poking and prodding—and hiring more “handlers”—is just too costly. So, it’s time to redesign our flow in a way that leverages the participants’ natural motivations for productivity, profit and success.

What do you think?

Uncertainty: The Elephant in the Room–Part 2

In a previous article on uncertainty, we talked about how uncertainty is viewed by the “customer” of IT versus how it is viewed by the information technologists (e.g., value-added reseller or VAR, IT department) themselves. We mentioned how the “buyer” or the “customer” may feel the only uncertainty for them is the questionable performance of the IT provider.

In this present article I hope to bring out some of the ways traditional methods of project management and corporate management may actually contribute to uncertainty rather than diminishing it. We will speak of this in the context of IT projects, but it actually holds true in almost any project environment (whether or not management recognizes that they have and manage “projects”.)

Pretending about numbers

In out business dealings we like to think that our dealings—both internally and externally—are driven by numbers and facts. What management almost always fails to acknowledge is that a great percentage of our dealings are as much driven by intuition as they by numbers. In fact, intuition frequently ends up driving the numbers.

Take for example the VAR who brings a prospective deal to his project managers (or equivalent) and asks them for an estimate for the services on a project that includes development, training, deployment and post-go live support. The project management (PM) team does its due diligence and comes back with an estimate: “We think it’s going to take $278,000 in services to get this done right.”

The sales managers and executives put their heads together and, purely out of intuition, say, “We can’t sell this project for that much money, but we really need the work right now.” Then, based on the sales department’s intuition and clout with the executives, the PM team is “encouraged” (read: “pressured”) to reconsider their estimate to see if they can’t get the project done for $232,000—which the salespeople believe is the number the prospect will “bite on.”

To make a long story short: the deal gets done and the client is quoted $232,000 in services for the project.

Now, even though the final number was not predicated on numeric calculations and numerical estimates—no, indeed, it was based almost entirely on intuition—there is nothing imprecise nor “intuitive” about the $232,000 figure that was written into the agreement.

The intuitive number now bears pretends to be a precise calculation—an “estimate” or a “project budget.”

In so doing, the reseller has just introduced at least $46,000 in uncertainty into the project. At a typical billing rate, let’s say 250 man-hours or about six-and-a-half man-weeks.

There are no “price complaints”

Several decades ago I had the privilege of working with the national sales manager of an organization with which I was doing considerable business. The gentleman told me something that I will never forget. He said, “There is no such as a ‘price complaint.’ There are only ‘value complaints.’”

I bring this up because the “pretending about numbers” scenario I mentioned above happens more frequently than most folks in the IT business care to admit. But, I don’t believe it has to happen.

Why is it that, most of the time, folks in the IT business never have any real discussions about the “value”—the hard ROI—that their solutions will deliver?

I believe that they do not have those discussions for a couple of very elementary reasons:

1. The customer doesn’t ask. Of course, one of the reasons the customer doesn’t ask is because they’ve heard all the typical “rules of thumb” benefits already. Another reason is because many executives and managers do not even believe in ROI from IT. They consider it a “cost center” and just throw money at it whenever they think it might help. These managers and executives frequently see adding new “IT stuff” or replacing their ERP systems akin to pouring an engine additive into their car. They expect if they do that their engine (their company) will run smoother, faster, longer and get better mileage, but they have no idea how to measure the benefits of “smoother,” “faster,” or “longer.”
   
2. The IT folks don’t know how to calculate it. No, I’m not saying that the executives and other folks in IT don’t know the formula for “ROI.” I’m saying that they are (generally) unwilling or unable to walk their clients or prospects through the process of developing the performance metrics by which the results of their combined (i.e., IT or VAR together with the firm or business unit affected) efforts will be measured.

If both parties—the customer and the IT service provider—are unwilling to confront the subject of real ROI from IT investments openly, objectively and with the aim of mutual agreement on the intended measurable results for the investment, then how can the VAR (or IT department) expect to build “value” in the mind of the buyer to support the “investment” required?

In my opinion, they can not. So, instead, they reduce their “estimates” and cut corners to make it fit into someone else’s “intuitive” budget constraint that is generally predicated entirely on “cost” and almost never on anything like a hard ROI.

Isn’t it time to stop doing business this way? It’s just adding more to the uncertainty in every project. No wonder there are so many IT project failures—or self-proclaim or assumed “successes” with no substantiation—all around us.

Let me know what you think.

Uncertainty: The Elephant in the Room

Not long ago I was fortunate enough to have a conversation with two very fine gentlemen in the software business. They were part of an organization well-recognized for its leadership as a reseller and a developer providing an ERP (enterprise resource planning) solution for Tier 2 and upper-crust SMB firms.

As part of the conversation, I mentioned the fact that uncertainty is “the elephant in the room” throughout the IT (information technology) business.

What I meant by that is this: while the sales process is underway, it all too frequently happens that the two parties have differing views of the uncertainty involved in any project that might be undertaken as a result of their conversation. While they hold these differing views, however, they almost never speak openly and explicitly about the uncertainty itself.

My experience shows me that these two parties hold views of the uncertainty that take shape somewhat along these lines:

• The Client or, more correctly, at this stage in the process, “the prospect” may believe that there is very little uncertainty about which to be concerned. After all, he and his organization have tried to be forthcoming with the reseller. They have answered all the questions the resellers’ folks have raised from the first day they met, and they have done so as directly as possible.
  
  Because “the prospect” feels this way, the only “uncertainty” he may feel about any proposed agreement is whether the reseller is capable of delivering on all the promises he has made over the course of the negotiations.
  
  Also, since “the prospect” will hold the checkbook during the project execution, he feels pretty sure that he can force the reseller into assuming whatever uncertainty might remain in the anticipated project.
  
• The Reseller has been through this many, many times. He is well aware that every project is full of uncertainty. A short list of the uncertainties in the reseller’s mind might look like this:
  • Have we asked enough questions?
  • Have we asked the right questions?
  • What don’t we know that we should know about this company and how it works?
  • Can the modifications we anticipate be completed in the time we have estimated?
  • Will the prospect’s company allow this project to proceed in the time we have estimated, or will their inefficiencies, indecision or other operational problems cause us to incur unanticipated time and expenses?
    

Accidentally induced uncertainties

W. Edwards Deming once summed up very succinctly the uncertainty included in all human communications. Following a meeting between two parties, as one party was exiting the room, Deming turned to the manager he was consulting and said, “We know what we told him, but we don’t know what he heard.”

Communications between two human beings are full of such foibles. The fact that the reseller’s salesperson does not believe that he has made any “promises” upon which the reseller cannot readily deliver does not mean that the prospect has not heard “promises” that are very different from what was intended by the salesperson.

Under such circumstances, there is—more likely than not—no intention by the reseller’s sales team to mislead the prospect. Neither, most likely, is there any intent by the prospect (now, client) to somehow misconstrue what was said in order to take undue advantage of the reseller.

Nevertheless, such accidentally induced uncertainties too frequently lead to cost overruns, hard feelings between the reseller and the client, and—sometimes—even to failed projects.

Why don’t we talk about it?

My question is simple: When it comes to IT projects (or any kind of projects, for that matter), and whether it is a relationship between an external IT provider or an internal customer relationship, why do we so often ignore “the elephant in the room”?

Why are both the customer and the supplier both so reluctant to speak explicitly about the uncertainties that almost inevitably affect a project of any significance or size?

Let me know your thoughts. Thanks.