Wednesday, December 31, 2014

What Will Impact Your Profit In 2015?


Profit is vanity 
Assets are Sanity 
but Cash is king! 

I am not too sure who came up with that phrase but whoever did is spot on. I have previously written about the problem of profit and have seen first hand how a profitable business almost went under due to a cash flow issue.

Understanding the issues related to managing 'by profit' is important as are understanding the benefits.

One of the key benefits of Profit and Loss statements are understanding the business expenses. As we head in to 2015 my question to you is:

"If you have more than 1 customer, do you know which customer (or customer channel) incurs more of your costs, and if so, are you adjusting your pricing or cost allocation method to account for the differences?"

Put another way, do you know your Cost To Serve?

In the retail / wholesale sector you will often find department stores with a very high cost to serve. In other words, wholesalers who distribute through the retailers will need to provide the retailer with a high first margin, rebates, marketing funds and potential markdown contribution. These costs potentially erode the wholesalers ability to fund future growth. Passing these costs on to the consumer is difficult as the retailer will want to manage their price points and in a competitive market may not want to pass on wholesaler costs to the consumer. Hence the wholesaler is in the difficult position of managing its ability to generate profit through careful expense management.

However these wholesalers typically distribute through a number of retailers. A cost allocation P&L will allow the business to see which retailer has a higher cost to serve. By understanding the cost to serve the business is able to allocate resources in a manner that generate the most profitable outcome.

Imagine the following scenario:

Customer A generates -2% profit / $10 mil revenue
Customer B generates 4% profit / $3 mil revenue
Customer C generates 15% profit / $1 mil revenue

or alternatively

Product A generates -2% profit / $10 mil revenue
Product B generates 4% profit / $3 mil revenue
Product C generates 15% profit / $1 mil revenue

Knowing this would force you to ask questions such as:

a) How do we make the the $10 mil revenue profitable? i.e. Is it possible to increase the gross margin, what costs can be reduced etc?
b) How do we grow the $1 mil opportunity? etc etc

Obviously this is much easier said (or written) than done but ultimately this is what good businesses do everyday. So back to my question. I'll put it another way. Even if your biggest customer will be expensive to manage in 2015 (the customer has a high cost to serve) will they be more or less profitable for you?


Sunday, August 10, 2014

HR - Change is coming

"It’s time to say good-bye to the Department of Human Resources. Well, not the useful tasks it performs. But the department per se must go."  Ram Charan, HBR July 2014

Every now and then you might read an article that gives you genuine food for thought. This happened to me last month when I read the one page HBR article, titled 'It's Time to Split HR' by Ram Charan. To be honest though I think I may be in the minority when I viewed the various defensive and HR apologists comments on the online article.

With the apologists in mind, I am most likely being optimistic in suggesting that my proposal, that I will call 'Building On Charan's Idea 2.0', is also given due consideration.

Charan's proposal is to eliminate the Chief Human Resources Officers and split the HR function into two, namely:
  1. HR-A (for Administration): "would primary manage compensation and benefit. It would report to the CFO"
  2. HR-LO (for leadership and Organisation): "would focus on improving  the people capability of the business and would report to the CEO"
The driver behind Charan's proposal is that CEO's disappointment in the HR function are borne out of the fact that the department it is staffed by employees who have not worked on the front line and do not understand the operational complexities of managing a business unit, division, business or company.

I agree with this!

And because I agree with this I am proposing a potentially more radical solution - merge the HR-LO into the line management and not have it as a separate reporting line. The Chief Marketing Officer should take the responsibilities of the HR-LO for Marketing. Likewise the National Sales Manager should take the responsibilities of the HR-LO. Don't pull line managers out of their operational role, bring the HR Leadership and Organisation into their role. The role of the HR-A will be an administrative support function. It does not get a seat at the table. However the capability is critical in making sure those line managers with the HR-LO responsibilities have the available tools to execute the role efficiently. This proposal is a high level outline and no doubt the naysayers will be vocal.

A number of organisations have tried this in parts however I have yet to see it successfully implemented. Issues I see around the reason for failure are that CEO's are often reluctant to let go of their CHRO due to the fact that:
  1. The CHRO is often seen as a "trusted adviser".
  2. The thought of making line managers responsible for the LO function is politically unsavory due to the backlash many may see as a burden on their already strained workload.
My view is simple. You either accept the status quo as positive for your business or you make fundamental change. It is simply not acceptable to keep lamenting on the inadequacy of an entire organisational function yet at the same time not adopt a model for change. CEO's, Managers and Bloggers alike need to stop bashing HR. The department is an easy target. It's time those that do bash HR stand up and take on the HR-LO responsibilities and bring the front line operational thinking and capability to the most important part of any organisation, people.


Sunday, June 15, 2014

Dr Jekyll and Mr Hyde: Struggling To Land That Job

First Impressions
I was talking to a HR contact recently about first perceptions when hiring and she relayed the following story to me. My contact was recruiting for a customer service based role. She put the ad up on a job board and clearly stated that one of the key requirements for the role was "To provide outstanding level of customer service." The following day the first resumes started to arrive. As she read each resume there was a standout applicant whose resume matched exactly what she was looking for. So she called the person and the call went through to voice mail where she was greeted with a very gruff "You know what to do". That's it. No "Hi you have called..." No pleasantries. Nothing but a gruff "You know what to do". Yep this person would be great at customer service!

I had a similar experience. I was receiving a number of resumes and one arrived in my inbox from big....@ (I'm not going to go in to details needless to say the applicant thought he was an adult film star). The tragedy was that is resume was actually quite good. However I could not get over the email address and kept thinking if this person was going to send me something like this what might they send to our customers.

It may sound harsh and I am sure many of you will read this and say it is just a voice mail or an email address but take a step back and think about it from the person doing the hiring. When one writes the job description an image of the ideal candidate is created. Sure we are not all perfect, but if you are someone who is going to be replying to a job ad it pays to think simply beyond the resume.

The reality, we as humans, make snap decisions based on first impressions. In fact some decisions can be made so fast that the reasoning mind has not even had a chance to react. Princeton Professor, Alex Todorov found in a study that "when we see a new face, our brains decide whether a person is attractive and trustworthy within a tenth of a second....people respond intuitively to faces so rapidly that our reasoning minds may not have time to influence the reaction". (Source).

Additionally the first impression can truly be the last impression.  In a 1992 study in the Journal of Personality and Social Psychology (Vol. 64, No. 3), Nalini Ambady, PhD, of Tufts University, and Robert Rosenthal, PhD, of the University of California, Riverside, found that after the first 30 seconds of the first class, students' evaluations of a teacher were similar to students who rated the teacher after the entire semester. (Source)

Landing that next great job is not easy. There are sure to be a multitude of candidates and competition will be tough. The question you have to ask yourself is will you be seen as Dr Jekyll or Mr Hyde? If decisions that will effect your career can be made so quickly, you need to ensure that you are one step ahead of the decision maker. There is no use having the resume of Dr Jekyll but answering the phone as Mr Hyde. Return to paragraph one if you remain uncertain.


Sunday, March 16, 2014

Selling On The Web: What I've Learnt About Websites, Social Media......

I was first involved in e-commerce over 14 years ago. At the time I was working for a Venture Capitalist / Accelerator who had invested in an online advertising aggregation site. I am sure you can imagine the pitch, "There are millions of small businesses out there and it is impossible to reach all of them but if we created a portal .....". Anyway it was hugely enjoyable, a massive learning experience and I got to be a part of the whole dot.com boom and bust. As an FYI to those who are interested in the true nature of the bust, when we were raising our second round of finance our revenue model predicated a US$400 million annual gross revenue when the site did not even have the ability to take a credit card. Good times :)

Fast forward 14 years and I thought I would summarise a couple of recurring points I see time and time again.

1 - It is not easy.

Forget the hype about how you can get an e-commerce website for $1 per day. That is the easy part. However scaling up to a serious business model takes hard work. Anyone can get a website but can you get anyone to come and buy your product.

I have lost count of the times that people say to me that they built a website but are disappointed with the income generated.

2 - Not all traffic is created equally.

Anyone can get traffic. With focus, SEO effort, new content etc your traffic will grow. So what! Do you want a million visitors with 10 buyers or 50 visitors with 15 buyers. If your target market is not coming to the site then who is?

It is critical you focus on building you traffic based on you genuine target audience and not simply the desire to increase your Google rankings.

3 - Google is GOD!

Here is some sobering data:

Search Market Share















Source:
http://www.comscore.com/Insights/Press_Releases/2013/8/comScore_Releases_July_2013_US_Search_Engine_Rankings

That’s right, 2 out of every 3 of your customers, who use search, are coming through one company.

Which brings me to the next piece of data from said company:





















Source: http://goo.gl/4RdLul

So basically even when you spend money advertising with Google, almost half (2*.72=1.44 of the original 3) of your customers are being driven by a search algorithm rather than the advertising.

In summary, it pays to go to the church of Google as almost half your customers who use search as part of their purchasing decision, are coming through this all powerful single entity.

4 – Conversion vs Traffic (Content)

One of the best internal web teams I saw set up was a very large retailer that had separate teams as part of their web strategy.

At this organisation the Traffic Team is responsible for bringing customers to the site.  The Conversion Team is responsible for converting the visitors to sales. The beauty of this model is it means that the teams were highly specialised in their fields and not distracted by metrics outside of their control. For example the Conversion team does not every worry about the number of visits as this was outside their control however the conversion rate of those that visited is a measure that is always top of mind.

I am sure there are countless methods of team set-up’s that exist however I found the simplicity and rifle shot focus of this model particularly interesting.

5 - Cowboys

Every industry has its fair share of cowboys but without any data and only my gut instinct I am certain that the e-commerce industry is home to more cowboys per capita of "specialists" than any other industry. How many companies (I use the term companies loosely here as who knows if the websites purporting to be companies truly are) promise:

  • we promise to get you on page 1 of Google
  • double your income
  • 100% ROI GAURANTEED !!!!!
I am not an expert at sifting out the pros versus the cowboys. I am the first to admit that a number of cowboys have made off with more of my money than the ROI that was promised. Do your best to do reference checks etc. Make sure you read the contract thoroughly. Beware of the cancellation periods of the contract. Make sure you can walk away on your terms.

6 - Experts

Having just written that the industry if full of cowboys, I have had the pleasure of working with genuine experts who do add value to the given e-commerce strategy. If you find a good expert listen, learn and pay....

7 - It's Expensive

That's right pay. Yes you can get a website for free. Yes you can buy a domain name for next nothing but the reality is that if you want to scale up to a million dollar e-commerce offering then you will end up spend a considerable amount of money.

The following articles are worth reading for the reality of e-commerce spending

'How Much Does An E-commerce Website Cost?'' - http://goo.gl/RMW36g - provides a great insight into e-commerce website costs and includes the opening statement,"We cut our teeth on e-commerce design back in 1996 while working on an online store for Footlocker. The project budget was approximately $500,000 and although I’m not involved anymore, the site continues to require upwards of $1,000,000 a year in maintenance and enhancements."

'E-commerce: I’ve never heard so much bullshit talked about a business model,' says Razorfish boss"- http://goo.gl/J0e8hh

"spin and bullshit" - http://goo.gl/S3wZf - note this is a guy who has built a $5 Billion business.

8 - Investing in social media

Is social media important? Yes. Is it the answer to all your prays to grow revenue? No. A little while ago a wrote an article titled "The Fundamental Problem With Social Media". As I have written previously on this area I am not going to say much more except reiterate my firm belief that Social Media is a marketing medium like TV, radio, direct mail, pr etc. You would not believe it with all the hype surrounding social  media but it is a medium and as such like all marketing expenses requires an investment to generate revenue.

So those are some very high level findings along my e-commerce learning voyage. Remember you always hear / read about the minority i.e. those few who built Amazon, Facebook, etc etc but you never read about hundreds of thousands (as at August 2013 there were over 700 million websites world wide - source http://goo.gl/9Boj04)  who have also tried but not been as lucky and or successful. Why? See point 1.