Technology Wars 2: The Search for More Profits

Almost a year ago I wrote an article entitled, “What does ‘demand-driven’ really mean?” in which I outlined a view of a supply chain driven end-to-end by real-time (or near real-time) demand feedback. My recollection of this writing was triggered today by an article that appeared today on the Financial Times website: “Technology: Smarter software helps minimise discounting.”

In the FT (Financial Times) article, Claer Barrett writes:

“As retailers grapple with falling consumer spending and rising costs, the smart use of technology is proving a valuable weapon.

“Creating a point-of-sale linked supply chain is the latest tactic that larger retailers are employing in order to manage inventories and minimise discounting.”

Among other things, Barrett discusses how the entire supply chain—from the retail all the way back to the manufacturer—is being forced to cope with greater and greater uncertainty. At the same time, Barrett correctly points out that today’s “consumer is more empowered than ever before” via online shopping and price-comparison options.

Barrett’s discussion of the matter leads directly to another topic on which I have written here a number of times—namely, market segmentation. [Click here for more.] Retailers everywhere are learning to collect and leverage high volumes of point-of-sale data, mostly through the proliferation of loyalty programs. [Note: I just checked my pockets. I must be a member a more than dozen loyalty programs ranging from pet supply stores to gas stations and more.]

Between a rock and hard place

Even with improved ability to segment the market and identify buying trends and patterns, the whole supply chain is still caught between the “opposing problems of excess inventory and stock shortages,” as Barrett puts it. Barrett, however, is far too gentle, I think. The horns of the dilemma should really be stated as

excess inventory versus stock-outs.

Almost everyone who has had responsibility for managing inventories of any kind knows exactly what I’m talking about. Being short on stock (low inventories) does not on whit of damage. But being out-of-stock means

1. Lost sales of the out-of-stock goods
2. Lost sales on other goods that may have been purchased by customers seeking the out-of-stock item(s)
3. Potentially, customers lost temporarily or even permanently to competitors

As I have stated elsewhere, the value of losses resulting from out-of-stock conditions—if calculated at all—is almost always vastly understated.

However, on the other end of the spectrum, even though the supply chain suffered out-of-stocks on (almost always) the most popular items, they are almost never able recoup the profits on those items for which they are overstocked.

No.

In fact, chances are they will have to liquidate their overstocked item at or below the price they paid for them. Hence, Barrett’s reference to finding ways to “minimise discounting.”

The key to creating more profits is a “demand-driven” supply chain

My article on a demand-driven supply chain suggests technology that is within the reach of almost every retailer today—not just the big-box merchants. But it requires management to seek two things that they are presently overlooking in far too great a degree;

1. The true cost of out-of-stocks to their operations and to the entire supply chain
   
2. The return-on-investment available to them for building a truly connected and collaborative supply chain

If you are a mid-market retailer, distributor, wholesaler or manufacturer, do not delay in pursuing the discovery of ways to create for yourself a sustainable competitive advantage even in a very challenging economy.

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Further reading: Dynamic Buffer Management (DBM)

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Richard D. Cushing is a senior solution architect at RKL eSolutions in Lancaster, PA.

Finding Common Ground Between CFO and COO–Part 8

[Continuation…]

Creating Irrefusable Offers: Example No. 1

A relatively small manufacturer had several large accounts in its market. However, due to the firm’s smaller size, the large accounts were quite reluctant to buy from it. Apparently, the buyers were afraid that the smaller manufacturer would not have the capacity to deliver the large quantity orders on time.

By setting about to understand its customers and its market better, this small manufacturer was able to discover that, while the larger accounts bought in large quantities—in order to get the price-breaks associated with such large quantity purchases—the firms did not actually consume the large quantities immediately. Instead, they ended up warehousing them for some period of time.

Here is the customizable/upgradeable offer that got the smaller manufacturer in the door with these big accounts:

“Agree to buy from us in the same quantities you have been buying from our competitors (e.g., 250,000 units at a time). We will match the competitors’ prices for these items during an introductory period—so you can gain assurance that we can deliver and you are fully satisfied with the quality. However, since you generally consume these at a rate of about 50,000 units a month, that is how we will deliver them to you and invoice you for them.

“In this way, we will save you the costs and headaches related to storing and handling the excess inventory. Additionally, you may customize your delivery rate—up to double—for any given month with just an email or a phone call to (XXX) XXX-XXXX and seven (7) days’ notice.

“Once you are fully satisfied with our service and quality, you may upgrade this plan by a) adding more products to the purchase agreement, and/or b) increasing your purchase volume on any product at special rates.”

This offer turned out to be a win-win. It helped the customers improve their results while allowing the small manufacturer to do business with the larger accounts without having to make additional investments in production facilities. (It was hard for the small manufacturer to produce 250,000 units at once, but they could easily produce and deliver 50,000 to 100,000 units a month without fail.)

This offer provided additional benefits for the large manufacturers: By taking delivery and being invoiced for the smaller quantities on a monthly basis, the large manufacturers actually experience improved cash-flow.

Creating Irrefusable Offers: Example No. 2

A pasta-maker wanted to take over a supermarket chain’s ordering process by employing vendor-managed inventory (VMI). When the chain’s management balked at the idea, the pasta company developed its own irrefusable offer. The pasta-maker said that they would park a truckload of pasta on the lot of the chain’s distribution center. If, at any time, the pasta-maker failed to deliver on-time what the chain needed, the chain could take whatever was short from the truck free of charge.

This irrefusable offer gave the chain’s management and buyers the assurances they needed to move ahead with the VMI plan. The pasta-maker, however, was so capable that the truck did not have to remain in the chain’s parking lot for long.

Here, again, we see the irrefusable offer being constructed around Toyota’s definition of quality—the customer’s measure of the experience and improved results. Also note that this irrefusable offer was targeted at a market of one with a consciousness of the customer’s specific needs and concerns.

[To be continued…]

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 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…]

Considering Project Accounting for Increased Profit

Many folks confuse the terms “project management” with “project accounting.” These terms are not synonymous. As might be inferred from their distinctions, project accounting is all about tracking the monies associated with projects. Project management is related to managing project tasks, time and resources.

While there are some software applications that handle both the project accounting (PA) and the project management (PM) aspects, most common applications handle only one side or the other. For example, Microsoft® Project™ is a very commonly used application for project management. It is worthless, however, for anything related to project accounting.

Why aren’t project management and project accounting found in the same application?

In most organizations, the fact that project management recording and project accounting transactions do not occur in the same application typically poses few hurdles to operational effectiveness. The reason for this is simple: typically the personnel intimately involved in managing tasks, time and resources (i.e., the project managers) are not the same folks who are intimately involved with handling the accounting aspects of the project (e.g., calculating, printing and sending the project invoices, making payments to project vendors, or assuring that expense or payroll transactions are processed on time). Therefore, the ability to share data via simple integrations or even via ad hoc queries or reports is quite frequently sufficient.

In fact, not infrequently, organizations actually prefer to have project managers and their activities kept separate from project accounting and its related activities. Doing so functions as a double-check and adds control in itself.

“We don’t do projects?” we hear you saying

You don’t think you’re in a “project”-type industry? Well, maybe you’re right. But consider these possibilities:

• Internal projects – Does your organization do internal projects for which you’d like to track costs accurately, even if you never bill anyone for the services? Do you do advertising campaigns? IT projects? Opening new locations? If so, then it is possible that your business could benefit from the additional controls provided by a project accounting solution.
  
• Engineer-to-Order – If you are a manufacturer in an engineer-to-order (ETO) industry, then project accounting might be applied to track your costs leading up to the manufacturing. Professional services and related costs and expenses can be tracked and managed using project accounting’s capabilities.
  
• Installation or After-Market Service – If your manufacturing or distribution operations extend themselves into the fields of installation, configuration or after-market service, then chances are project accounting is not the right solution for you. In such cases, you should read the section on Service Management.

What can Project Accounting do for you?

There many time-saving functions brought to you through the project accounting capabilities that dramatically reduce the time, energy and effort that would otherwise be required. Here is a sampling:

Profit Recognition

Projects may recognize profit/(loss) in several different ways. Most PA solutions allow users to assign the profit recognition method by project. The typical profit recognition methods include:

1. Manual
2. Cost-to-cost percent
3. Percent of revenues
4. Non-WIP
5. Project completion
6. Percent of elapsed time

“Percent of elapsed time” is a profit-recognition method commonly used with prepaid date-limited service contracts. If this is a common method in your firm, be sure to investigate Service Management solutions as well. In some circumstances, service management may be the more appropriate solution to apply.

Project Billing Methods

Project accounting software typically offers several options for billing and projects may be of different billing types:

1. Time and materials
2. Fixed price
3. Fixed price plus

When a project is designated a “time and materials” billing type, most project accounting systems allow the materials items to be passed through at cost to the customer, or billed with a mark-up add to designated materials and other non-labor charges.

Billing for Employee Time

Businesses that bill their clients for employee time spent on various projects often face the daunting task of keeping the billing correct based on agreements with their various clients. Not infrequently such agreements may involve complexities that would require considerable time and care if attempted without the support of a project accounting system.

For example, clients may negotiate different rates for different specific employees when working their projects. Indeed, they may end up negotiating different rates for the same specific employee on different projects—several of which projects may be underway at any one time with the same client. As you can imagine, assuring that project billings are assigned the right rate for the right resource on a project by project basis could become a difficult task. Project accounting systems handle such billings effectively and simply with little effort.

Add to the potential complexity described above the ability to also bill different rates to different projects or different customers based on the employees’ titles in their assignments to different projects and you can readily see that manually tracking all of the potential combinations could become a nearly impossible task. Here, for example, employee Jim Smith might bear the title “Project Manager” on one project for one client and, as the Project Manager be billed at $225 per hour. However, due to Jim’s lack of experience in another type of project, he may bear the title “Developer” on that project and be billed to the same client (or a different client) at a rate of only $150 per hour.

Increasing throughput and profits

Now, you might say, “I don’t need all that complexity in my projects. We’re content with billing just one rate per project, one rate per client, or one rate per employee across all projects and clients.

Our question in response is this: “Why wouldn’t you want to make more money tomorrow than you are making today if you could do so without adding significantly to your operating expenses by doing so?”

We ask this because this is precisely what a project accounting solution could do for you and your firm.

Chances are your client’s aren’t stupid. They know that a good and effective project manager is more valuable to them than a heads-down programmer or a project secretary or, perhaps, a QA staffer. Right now, you are likely charging the same for each of these, which mean you must be using an “averaged” rate.

By adding project accounting’s flexibility, you are also adding the low-cost option of further segmenting your market and closing more deals. You can charge clients more or less based on how your crack sales team identifies the prospect’s or client’s view of “value.” Two projects that are virtually identical in their execution may have two significantly different values to two distinctly different clients. Consider the following chart:

Project ID	Est. Project Cost	Est. Project Revenues	Est. Project Profit
A	$ 165,000	$ 260,000	$ 95,000
B	$ 165,000	$ 220,000	$ 55,000
C	$ 165,000	$ 200,000	$ 35,000

Here we see virtually identical projects on the “cost” side. However, three different clients perceive the “value” of the efforts differently in their businesses. One is willing to pay $260,000 for the work; another is willing to pay $220,000 for it; and third sees only $200,000 in value and won’t pay a cent more.

If your PA system only allows you to charge these clients one rate—or if you don’t want to burden your accounting department with manually managing different billing rates per client—you may be tempted to turn down Projects ‘B’ and ‘C’.

Why give up the profits?

But, if your firm has the capacity to do projects ‘B’ and ‘C’, and no more profitable project prospects stand in your way, why would you turn down an extra $90,000 ($55,000 plus $35,000) in project profits simply because your accounting system makes it too difficult to manage. (Actually, that is not the reason such profits are all too frequently passed by. Instead, it is because executives and the sales team—hemmed in by preconceptions about their accounting limitations—never think of making these offers. Instead, they offer their ‘bids’ using the firm’s standard costs and markups and end up losing the deals for Projects ‘B’ and ‘C’.)

Leveraging new capabilities for new profits

In short, leveraging the new flexibilities delivered by a project accounting solution may allow your firm to dramatically increase revenues and profits through market segmentation. However, doing so means bringing to your firm new ways of thinking (as seen above) and an understanding how newly delivered capabilities can, in fact, be applied to create new markets or extend existing ones. This means finding the right implementation partner is essential.

It is imperative that you not make the common mistake made by some many executives and managers when considering the purchase and implementation of project accounting software. Typically they spend more than 90 percent of their time and effort in what the process of “software selection,” carefully considering a long list of features and functions. Then, when this is all done, they simply take whatever consulting firm and consultants come along with the software. We believe this is a wrong-headed approach and many firms to make investments in software with little return on their investment.

There are three critical aspects necessary for a project accounting implementation leading to rapid and high return-on-investment:

• The ability to unlock “tribal knowledge”
  
• The ability to reduce complex problems to simple solutions
  
• The ability to help your organization “design” new ways to leverage new capabilities for increasing throughput and profit

If the software reseller cannot bring to your firm these critical elements, perhaps you should look elsewhere.

The New ERP – Part 38

Yet another "Why ERP implementations fail"

Sue Bergamo, former CIO at Aramark's WearGuard & Galls companies, recently posted an article entitled "Is Your Implementation in Trouble?" (Bergamo 2010) In her writing, she listed seven "high level categories…. in the order from the highest to lowest number of responses" from her informal LinkedIn survey. Here is how the list shaped up:

1. A misconception of business expectations
   
2. The lack of top level leadership involvement in the project
   
3. Business processes were not correctly redefined and continued to be inefficient
   
4. The impact of the organizational change was not addressed properly and caused a major upheaval in the company
   
5. The vendor wasn't managed correctly and over-promised, then under delivered [sic]
   
6. Project management was weak and over-customizations lead to increased scope and time
   
7. The integration of diverse applications was harder than anyone expected
   (Bergamo 2010)
   

We are going to drill-down on these and put them into the context of the New ERP – Extended Readiness for Profit, contrasting them with traditional ERP – Everything Replacement Projects to see if using the New ERP approach would have mitigated the failures.

1. Misconceptions of business expectations 

Ms. Bergamo does not explain in her short article precisely who had the misconceptions of business expectations. We do not know whether, in the Bergamo survey, the misconceptions were held by all or part of the management team involved in the ERP acquisition, by the vendors and resellers involved, and/or by third-party consultants that may also have been a part of the ERP project. My experience tells me, however, that if persons were involved in a traditional ERP – Everything Replacement Project the likelihood is very high they had and held "misconceptions of business expectations."

Why do I say this so boldly?

Because, unfortunately, most organizations do not begin their search for traditional ERP with clarity on the three critical factors we have discussed earlier in this series:

Management Factor Number 1: What needs to change

If executives and managers applied rational tools to determine precisely – not vaguely – what needs to change so that the business could make more money tomorrow than it is making today, the "business expectations" would be clear.

Sadly, many organizations today still pour in traditional ERP like some kind of "miracle-working additive" that is supposed to make their whole enterprise run smoother, cleaner, faster and, as a result, produce more profit. It seems that 20 or 30 years of experience with ERP not delivering its supposed miracle-working power in so many implementations is not yet enough to convince some. Such executives continue to drink the proverbial Kool-Aid offered by ERP software vendors and VARs just as if the hundreds of bad experiences being reported are only mirages and the same could not and would not happen to their firm.

I have walked into dozens of traditional ERP projects where, if asked, no one in executive management could tell me what measurable improvements were expected when the implementation was complete. If they were able to reply at all, their answers sounded more like they were drawn from a séance than from a the mouth of an executive. They might sound something like these:

"We expect that this new ERP system will enable us to grow while holding down our operating expenses."

"We are counting on this new system to help us ship more efficiently."

"Our ERP vendor told us that this new system should help us reduce our inventories without sacrificing customer service. Plus, it will help us build 'best practices' into our back-office."

Now, I have no problem with "We expect that this new ERP system will enable us to grow…" provided that statement is followed by specifics like:

• How much is it likely to "help us to grow"?
  
• What specific changes will the new ERP system bring about that will lead to the expected growth?
  

In the absence of specifics, how can those who complained in Ms. Bergamo's study even complain that they had a "misconception of business expectations"? Was their expectation that they would mystically grow, but they did not, in fact, achieve their concept of mystical growth? Did they expect that profits would mystically improve, but the mystical improvement in profits never appeared?

Just what were their "business expectations"?

If "business expectations" were not defined in clear cause-and-effect terms up front: if the executives and managers could not – in advance – link specific anticipated changes in the "system" (i.e., how the organization itself functions) to the anticipated and measurable improvement, then they have no one to blame for "misconceptions of business expectations" other than themselves. If they drank the vendor's or reseller's Kool-Aid about ROI (return on investment) and did not establish for themselves the metrics for specific and measurable change, they cannot blame the vendor or reseller. It is management's job to know these things and not to simply take a salesperson's (or even a consultant's) word on such matters.

Management Factor Number 2: What the change should look like

If executives and managers have proactively worked out rational cause-and-effect relationships, and have determined clearly and specifically what needs to change, the next step become relatively easy. That step is for the management team to establish what the change should look like.

If applying new technology in the organization (i.e., the system) will "increase Throughput by an estimated 12.5% over 12 months by providing improved market segmentation for Product Line C," then what the change should look like will be described in terms of the changes required to "improve market segmentation for Product Line C." That change might take the form of new market data collection techniques, new automated surveys, or some other form. Nevertheless, there should be no confusion in the management team members' minds as to what the change should look like when it has been implemented.

Similarly, the management team should understand the changes necessary to leverage "improved market segmentation" into "an estimated 12.5%" increase in Throughput over 12 months. The executives and managers should have a clear understanding of how the new market segmentation data will lead to new "offers" in the marketplace that will, in turn, lead to the anticipated growth.

Management Factor Number 3: How to effect the change

What we have described above are real and concrete "business expectations." There is no easy way to misconceive "business expectations" that are so clearly articulated. This kind of "expectation" can be the basis of concrete action. These kinds of "expectations" can become a guide for how to effect the change.

The meaningless séance-induced "business expectations" so frequently articulated by executives and managers surrounding traditional ERP hold little hope of functioning as a guiding light for concrete action on the part of anyone in the organization. It is no wonder that "expectations" are only met in so few traditional ERP implementations.

[To be continued]

©2010 Richard D. Cushing


 

Works Cited

Bergamo, Sue. CIO Update: Is Your ERP Implementation in Trouble? Feb 01, 2010. http://www.cioupdate.com/features/article.php/3862056/Is-Your-ERP-Implementation-in-Trouble.htm (accessed Feb 02, 2010).


 

Business Intelligence and “Tribal Knowledge” – Part 3

In Part 2 of this series, we ended by say just how valuable it is to begin unlocking the "tribal knowledge" that is undoubtedly resident in the minds of the people you have working in your business enterprise.

Taking another look a the client's situation I have been referencing in this series, the client has a complex sales cycle that involved multiple individuals and organizations in the processes of funding and purchase decision-making. To refresh our collective memories, here's a list of the participants we have previously identified:

• The school district, including administrators and, sometimes, board members
  
• The school(s) and the school(s)'s administrators
  
• Teacher(s)
  
• The school(s) and/or school district's IT department
  
• Government programs and associated bureaucrats
  
• Not-for-profit or other sponsors
  

Now, it seems clear, each of these participants that may be involved in the process of a single sale to a school or district will likely have somewhat different motivations for buying the products offered by my client. For example, what excites a teacher about using the product in his or her classroom will probably have an influence on the school and school district's administrators. But in order to get the administrators to look upon the purchase favorably will involve other satisfactions and assurances than those required by the teacher alone. The same may be said for all of the potential parties involved.

Asking the right question to unlock "tribal knowledge"

While looking at current sales accompanied by geographic, demographic or even salesperson correlations may be helpful in seeing some patterns that can be leveraged to increase Throughput, if an organization is going to come up with real breakthrough offers – so-called "mafia" offers, because they are offers that can't be refused – will probably require more than that. It requires unlocking tribal knowledge so that the firm's mark can be segmented and the "offers" can be ever more targeted and effective.

When many companies begin this process, they begin by asking the wrong question (in my opinion). They ask their sales and marketing team something along this line: "Why do our customers buy from us?"

Of course, this makes sense, doesn't it? This question correlates to the data the management team looked at in Part 2 of this series. They looked at differences between Category A sales and Category E sales and now they want to know why so many customers in Category A bought from us.

The right question to ask, however, revolves around what is keeping the company from making more money tomorrow than they are making today, and that question would be: "Why did so many potential customers in Category E not buy from us?" After all, it is the lack of sales that is keeping the organization from increasing Throughput; therefore, it is essential to find out what is keeping sales from happening. In theory, all of the prospects have already been exposed to the factors that caused those who already purchased to decide favorably.

Unlocking "tribal knowledge" to identify patterns and constraints

If my client's team were to begin by sitting down with their sales team, they might put forward a challenge something along these lines to them:

"I want each of you to list the 5 top things – from your experience – that keep you from selling more (fill in the blank)." (The blank might be a product, a product line, in specific geographic areas, or in specific demographic categories.)

[Note: Ideally, it would be good to correlate the results of this into a Current Reality Tree to further unlock potential root causes, as there likely are some that should be addressed. However, let us leave that aside right now and just consider the matter with regard to "business intelligence."]

Discussions evolving from the resulting list of sales inhibitors – along with some provocations to think below the surface – might result in some fascinating factors emerging. The results might lead to understandings similar to this hypothetical list:

• It seems like it is easier to sell Product A into school districts where the administrator is younger and, therefore, more likely to be attuned to technology in education.
  
• It seems like it is easier to make a strong and effective ally of a teacher with more than 5 years in service, but fewer than 15 years. (This might be because the less experienced ones don't have the confidence to bring new ideas to their administration and the ones with more than 15 years in-service are "stuck" in their old ways.)
  
• It seems like it is more difficult to sell Product C into inner-city school districts with high populations (fill in the blank with an ethnicity).
  
• We have not yet discovered how to interest upper-class suburban school districts in our Product Line B.
  

Now, from the tribal knowledge the management team has just begun to unlock, there should be a two-pronged approach to moving forward:

1. Statistical verification
   
2. Development of new "mafia" offer concepts
   

Which portion of this two-pronged effort should receive the major emphasis should be guided by another tribal knowledge factor – intuition – which is right far more often than it is wrong. If the team intuitively senses a strong, "YES! We've hit on something that rings true." Then, the emphasis should probably be given to the development of breakthrough thinking for new "mafia" offers to overcome the constraint and in Throughput.

On the other hand, if the team is more reserved about an emerging concept – if they believe it has some validity, but would feel more comfortable if it could be further corroborated, then the team should put the emphasis on statistical verification.

Statistical verification

The process of statistical verification gets us back to "business intelligence" in an information technology sense. However, it is likely that the appropriate demographic data is not presently available to the firm at this moment. For example, school or school district administrators' and teachers' years in service is probably not a data point currently being collected.

In this scenario, if I were on the management team at this client, I would strongly suggest that we take two or three years of sales history and take a survey. If the firm presently has excess capacity, then take some of the excess capacity resources and put them to the task of calling these customers to gather the demographic data in question: "Years in service."

[Note: If the firm is going to have this done, there might be other demographic data that has come to light and may be of value as well, such as the inner-city ethnic composition of the schools and school districts. And, by the way, while this survey is being undertaken, I would add another element: Gather email addresses and permission to correspond with these parties electronically with occasional messages "including helpful news about technology applications in education and other valuable education insights."]

Similarly, even without formal data accessibility or a lot of detailed research (although much would probably readily accessible via the Web), the firm's team could probably add reasonably accurate demographic data regarding "inner-city" versus "upper-class suburban" schools and school districts that could be used for further analysis. These data may be refined and made more accurate as time and data availability allow.

Once the demographic data is collected, it will be a relatively simple matter to see if there is a real statistical correlation matching the team's intuitive sense regarding years in service for administrators and teachers.

Development of new "mafia" offers

As we said above, a "mafia" offer is simply an offer constructed in such a way that it is simply too good to be refused. This means understanding the motivations of the market segment you are approaching and, as the organization grows in its application of this powerful blend of tribal knowledge and business intelligence, its ability to segment its market into smaller and smaller elements will grow. This will tend to increase the firm's ability to offer even more targeted "mafia" offers.

Going back to some of the examples mentioned above, consider the following:

• It seems like it is easier to make a strong and effective ally of a teacher with more than 5 years in service, but fewer than 15 years. (This might be because the less experienced ones don't have the confidence to bring new ideas to their administration and the ones with more than 15 years in-service are "stuck" in their old ways.)
  • Example question to ask: How can we develop a "mafia" offer that will convince teachers with less experience to become a stronger and more effective ally in bringing out products to their superiors?
    
  • "Mafia" offer concepts: This might involve a "hand-holding" offer with more direct involvement with the teacher in this process, or simply providing more effective "ammunition" so the teacher feels better equipped to address questions from his or her superiors in administration.
    
• 
  
  
  It seems like it is more difficult to sell Product C into inner-city school districts with high populations (fill in the blank with an ethnicity).
  • Example questions to ask: What can we learn about the specific culture (ethnicity) so that we can construct "mafia" offers that will overthrow the reticence exhibited by this culture in adopting our products for education?
    
• We have not yet discovered how to interest upper-class suburban school districts in our Product Line B.
  • Example questions to ask: What are the objections raised by those in upper-class suburban school districts when approached regarding Product Line B? How can we develop new "offers" that overthrow these objections?
    

Hopefully, if I have been clear, you are beginning to see how power the blending of tribal knowledge with computer-based, low-cost business intelligence could be to help your firm segment its market and create breakthrough "mafia" offers that should lead to increased Throughput.

Contact me rcushing@geewhiz2roi.com if you have questions or would like assistance in applying these techniques effectively in your organization.

©2010 Richard D. Cushing


 

Business Intelligence and “Tribal Knowledge” – Part 1

Recently I was working with a client and, at the opening of the meeting, I asked the six members of their management team who were gathered around the table the following simple question: "What is keeping your from making more money tomorrow than you're making today?"

Their responses were telling: (approximate quotations)

1. "We don't understand our customers: Who is buying, why they buy, or how they go about the process of getting a purchase authorized."
   
2. "The amount of time it takes us to respond to a lead or prospect. We might get 20 to 300 leads from a trade show, but it might takes us three weeks to six months to get back to them after the leads have gone through all the hands and processes in our organization."
   
3. "We don't have a good way to turn the data we possess into information that would be valuable for decision-making."
   
4. "We don't have a good way to classify accounts in our customer relationship management (CRM) software so we know how to best approach them regarding our products and services."
   
5. "We don't understand the secondary participants involved in our sales process with a prospect."
   
6. "Our customers lack the funds to buy our products."
   

What is interesting about this is that, if we take number 2 out of the mix (this is clearly a policy constraint) the other five responses all have to do with "business intelligence." These folks needed to understand their customers better in virtually every aspect.

Now, in their defense, this firm has a fairly complex sales cycle with, potentially, a number of different parties involved. Here's a brief description of the participants and their relationship to the sales process:

• School District – Usually, it is the school district that will end up "owning" the product after purchase. Frequently it is at the district level, as well, that the purchase commitment must be authorized.
  
• School(s) – The individual schools and school administrators may have an impact on the purchase decision. The school(s) must be willing to take on the product before the school district will authorize the purchase, even if the teacher may have convinced the district administrator and board that it is the right way to go.
  
• Teacher(s) – Teachers function mostly as influencers and catalysts to the sale. The teachers often are sold on the product and then become an advocate to aid in getting the product approved at the school and district levels.
  
• School District IT Department – Since the products generally involve technology, it is not uncommon for the schools' or the district's IT departments to have de facto veto power over any pending purchase of such technology.
  
• Government Programs – Since most of the schools in the U.S. are publicly funded, the funding for many of the purchases flows directly or indirectly from some government program. Such programs often set requirements and seem to have a never-ending series of "hoops" that must be jumped through before funds are made accessible for specific purchases.
  
• NFP or Other Sponsor – When the school districts' ability to access funds for a desired product purchase falls short, sometimes not-for-profit (NFP) organizations become a supplemental source of funds. Sometimes, it is even the NFP, seeking a place for its funds in community projects, that becomes the initiator of the whole process. Other times, the interested teacher may know that the school or school district have no money for the purchase, so he or she will seek aid from a NFP organization simultaneous with presenting the matter to the school and district decision-makers.
  

As you can see, with all of these participants, and no single path for each approach, it is understandable that this organization is discovering some challenges in "understanding" their customers. Add to this the fact that their business itself was changing. They were diversifying from the product around which the business had originally been built – beginning to sell a broader range of related products into the same marketplace.

Tools at their disposal

Now, this firm does have some tools at their fingertips. They purchase the use of data made available from a data aggregator that provides a database of schools, school districts and related parties. Some demographic data is included.

Now, I am not privy to exactly what demographic data is available to them – our discussions didn't go to that level. However, for the sake of this discussion, let us say that they have just the following data points for each school and district (in additional to standard data like addresses, phone numbers, and so forth):

• ZIP code
  
• Number of students
  
• Number of teachers
  

Using a tool as rudimentary as Microsoft Excel's OLAP capabilities, it would be relatively easy to spot correlations in the data between product sales (by dollar or by units) and these demographic characteristics:

• Which regions of the country account for the most sales? The least sales?
  
  • Using the first digits in the ZIP Code gives you 10 regions automatically
    
  • Using the first three digits in the ZIP Code gives you a breakdown by what the USPS call SCF (Sectional Center Facility)
    
• Which states account for the most sales? The least sales?
  
• Which cities account for the most sales? The least sales?
  
• Which districts produce the highest ratio of unit sales to students? Which ones have the lowest ratio? What about the unit-to-teacher ratio?
  

My guess is, if they had graphs of these data – especially TOP and BOTTOM data – their sales and marketing personnel would immediately begin to see some patterns emerging.

Likely, however, they have other data already in their possession that would give them additional insights as to sales patterns leading to a better understanding of their customers' behavior. Take the following examples:

• Which salespersons produced the highest sales in terms of dollars and units? Which ones produced the least?
  
• Within each salesperson's sales, are there significant differences by sales by geographical region or SCF?
  
• Are there correlations between salespersons' sales and the discounts offered? (This would be an indicator of price sensitivity and should be correlated by other factors, like geography or average sale size.)
  
• Do correlations exist between salespersons' sales results and the products or product configurations they sell most frequently?
  

Little of this kind of analysis was being done in a formal way at this firm. However, it seemed that they already knew they needed to "understand their customer" better. They just had not yet thought about how to leverage what they already had in their hands in order to begin segmenting their market and understanding the factors leading to less success or more success (read: Throughput).

We will talk more about this in the next post in this series.

©2010 Richard D. Cushing