accenture competitive pricing harnessing power waterfall model

7/27/2019 Accenture Competitive Pricing Harnessing Power Waterfall Model

1/12

Leading-edge Pricing:Harnessing the Power of the WaterfallBy Anthony Milani, Ray Florio, Tiago Salvador and Hyun Suk Oh


2/12

Customers will always want more for less. In an effort to provide

the most compelling value proposition, companies in a wide range of

industriesconsumer packaged goods, resources, professional services,

hospitality, oilfield services, manufacturing and moreface continuouspressure to provide fresh offerings, extend existing services and find new

partners with which to collaborate. Recent economic turmoil has greatly

accelerated this process, as companies merge, consolidate and expand

to provide the best, most comprehensive deal to more ROI-focused

business-to-business customers.

Unfortunately, this had led to such diverse and multi-faceted offerings

that most companies cannot hope to peg the underlying costs of

deals to determine if they are pricing and negotiating profitably. More

importantly, these companies are limited in understanding whether they

are pricing and negotiating the right products to the right customers.

The processes and systems that identified and tracked their cost data,

designed for creating financial statements, were never intended toprovide sales organizations with the inputs required for sophisticated deal

and contract management.

While a fully allocated price and cost waterfall can address this

issue, many companies struggle in its creation, value realization and

industrializationa comprehensive approach that is necessary forsuccess. Fortunately, there are some key steps high performance

businesses can take to avoid the typical pitfalls.

1


3/12

While businesses are locked in challenges

to enhance value propositions that attract

and retain customers, the recent economicturmoil has greatly accelerated the process.

Just think of all the mergers, acquisitions,

joint ventures and consolidation activity that

happened during the height of the recession

in 2009. Even as the recovery takes hold,

the trend appears to continue in 2013 based

upon a recent study that shows 76 percent

of respondents anticipated their company

would be involved in merger activities

this year.1

All of this activity has resulted in the

majority of companies expanding their

product and service catalogs, as well astheir cost base and resources much more

quickly. Moreover, once these new offerings

are available, they begin permeating

the majority of contracts, as sales

representatives look for any advantage over

the competition, with little visibility into

the true cost of that extra edge.

Employees and facilities that become idle

when services are underutilized also remain

an ongoing cost that are not typically

assigned or tracked. Unfortunately, if

Introduction: Doing more for lesscalculating the profitability of each deal,

customer or product was difficult five to 10

years ago, a true measure of profitability iseven more problematic today.

No one would advocate pricing solely

based on cost. For the vast majority of

companies, such a fundamental basis for

pricing became obsolete decades ago.

However, understanding true cost to serve

is a critical component of decision making,

and is a necessary first step to employing

more sophisticated pricing. Of course, for

many corporations, this key input is sorely

lacking.

2

1.Mergers and Acquisitions on the Rise for 2013, Proformative, Jan. 23, 2013,

http://www.proformative.com/news/1497051/mergers-acquisitions-rise-2013


4/12

Fortunately, companies can gain the necessary insights and act upon them by developing a full price and cost waterfall for each deal.

This practice provides insight into true profitabilityafter all costs are taken into accountbeyond just cost of goods sold (COGS). The

waterfall might include customer-specific costs, such as specialized sales personnel or marketing events; nuisance costs like restocking

from returns; and even costs that may not be in the profit and loss statements, such as late payment costs (see Figure 1).

$0$K $20 $40 $60 $80 $100 $140$120

Pocket Margin

Basic Product/Service

Add-ons and Extras

List Price

Regional Adjustments

Regional Price

Contracted Discount

Contracted Price

Additional Negotiated Discount

Negotiated PriceAllowances/Returns

Rebates/Chargebacks

Promotions

Volume Discount

Payment Terms Discount

Surcharges

Expedited Freight

Pocket Price

Cost of Goods Sold

Freight

Third Party Charges

Other Variable Costs

Contribution Margin

Brokerage Fees/Commissions

Marketing and Advertising

Sales Compensation and Benefits

Proposal and Relationship Building

After-Sales Incentives

Product Development

Customer Service

Disputes

Bad Debt Expense

Inventory Carrying CostsStandard Terms

Non-Standard Terms

Cost of Late Payments

Technical Services

Dedicated Fixed Assets

Other Indirect Costs

Figure 1: Most companies look at contribution margin to determine profitability by deal; however,they should be looking at pocket margin

(Source: Example waterfall of cost s to take into account using figurative data.)

3


5/12

One of the first reactions to a waterfall

is the ever common, We dont keep

track of all those costs at a deal level.Typically, companies do not. Instead they

build their financial tracking systems and

processes for the purposes of generating

financial reports. In fact, for some complex

businesses, fully tracking all of these

components could seem insurmountable,

but some simple logic can quickly and fairly

accurately assign the appropriate costs to

each deal. If done properly, it will provide

actionable information that is a close

approximation to reality. The tradeoff in

precision will be worthwhile.

Some executives in the organization may

still hesitate because they do not see the

benefits of this level of information, or

they believe COGS and other direct costs

is enough information for decision making.

Despite this common belief, companies

that do develop a waterfall often find the

decisions based on direct costs alone were

not right. As a matter of fact, customers

previously considered to be highly

profitable may actually have large indirectcosts, leading to losses on most sales.

Understanding true profitability will

impact far more than pricing decisions.

Incorporating this information into

customer, product and sales strategies can

make a difference for companies. Imagine

being able to direct the right products to

the customers who will actually provide the

highest bottom line profits for the company,

instead of those who will simply pay the

most.On top of that, consider the benefit in

negotiations if the sales organization can

leverage past information to quantify the

impact on margin for each individual add-

on service or contract term on margin, and

make the appropriate tradeoffs. If that is

not compelling enough, think how much

As an example, meatpackers or other food and beverage companies have

often found that some of their large distributors actually eroded profits due

to strict packaging requirements. These requirements demanded more labor

and equipment in facilities than were needed to service other customers.

In addition, frequent returns necessitated extra sales and support staff,along with associated costs for restocking and waste. Looking only at direct

costs, these types of customers previously may have been considered the

first choice for any sales; however bringing all factors into view provides a

different perspective for the customer strategy.

better cost-cutting decisions will be now

knowing how much the company leverages

a particular resource and the value it

adds, along with understanding the degree

necessary to cut costs in order to maintainproper margins on market-relevant prices.

In reality, though there can be major

benefits, most companies quickly realize

that achieving full visibility into the

true profitability of each and every deal,

and then getting the benefits from that

knowledge, is neither a simple nor a short

process. Many companies attempt it

numerous times before f inally achieving

success. Fortunately, the pitfalls they

encounter tend to be the same. The

companies that understand the key barrierscan greatly simplify the process and

shorten the time to realizing the benefits,

and eventually adopt this new way of doing

business throughout their organization.

But were not structured to do that

4


6/12

Guiding principles for the journeyThe journey towards understanding and leveraging true profitability in a companys decision making can be broken down into three

distinct phases: waterfall creation or model building, value realization or acting upon newfound opportunities, and industrialization or

making the entire process sustainable in the organization (see Figure 2).

Figure 2: The three-phase journey to achieving visibility into true profitability

Waterfall Creation Value Realization Industrialization

Before delving into the details, there are a

few guiding principles to keep in mind:

Have the right sponsorSince the journey affects so many areas

across the company, the appropriate

sponsor should be a well-respected

influencer at a high enough level to bring

together the necessary stakeholders. By

being engaged throughout the journey, thesponsor will actively serve as an advisor

providing guidance and ensuring

forward progression.

Make it an ongoing journeyThis is not a one-time effort to achieve short-

term goals. The true advantages from a deal-

level profitability effort come from ongoing

benefits realization year over year. Putting in

place a waterfall is a cultural shift; getting

the most out of it requires that it become

part of day-to-day life in the company. If

the initiative is viewed only for short-term

margin gains, the company will get only asmall share of the potential benefits.

Let the business leadDo not make this a finance or IT initiative. All

of the decisions, outcomes and success relies

on the entire business. A waterfall approach

needs the business to fully embrace and drive

it from the beginning. Sales, operations and

leadership need to understand and accept

responsibility for the quality of the outputs

and improvements. Getting these functionsonboard and engaged at the onset will more

likely lead to success.

Start smallTrying to implement deal-level profitability

across the entire business all at once is

daunting. Some functions will be less open

to this change until its value is proven, and

there will be a large number of differences

in the cost base across business lines and

geographies. Begin with a segment of the

business that is receptive, demonstrate

success and then expand from there.

Focus on outcomesA good profitability model is extremely

helpful, but it is how an organization

leverages it that counts. The entire effort

is only worthwhile if it results in tangible

benefits for the business, and those benefits

need to cover the spectrumfrom simply

plugging data gaps to make way for future

improvements to the model, to identifying

major profit opportunities for the company

5


7/126

A detailed look at the three phasesAs companies embark on the journey

depicted in Figure 2, there are important

details for each phase, as well as methodsto avoid typical pitfalls during each:

Waterfall creationThe first step to gaining and acting on a full

understanding of deal-level profitability is

to calculate that profitability. The resulting

waterfall model will serve as the basis for

the remainder of the effort . Unfortunately,

many companies find themselves halted by

barriers at this early stage, trying numerous

methods to develop a waterfall butfalling short.

Companies can use this situation to their

advantage, though. Analyze previous

attempts and understand why they failed.

Was the model growing too complex?

Did it require too much effort to sustain?

Did it grow outdated too quickly? Did the

necessary stakeholders not understand

it? Whatever the cause, the learning

experience helps to avoid making the same

mistake again.After identifying what caused the company

to stall, or if attempting this for the first

time, begin with the philosophy that the

end product is not a financial report or an

accounting tool. It is a decision-making aid

meaning if it is off by $57 dollars on $3

billion in revenues, it is unlikely that the

resulting actions will change significantly.

Efforts to reconcile small discrepancies

across multiple financial systems usually

do not add much value, so avoid tracking

every penny. Provided that the results alignreasonably well with a widely accepted

external standard, such as the companys

profit and loss statement, then the results

are close to accurate for decision making

and will build confidence in the underlying

numbers.

Allocating costs down to individual deals is

likely to be the next sticking point, and one

that generally generates debate over how

to properly assign costs. Take an approach

that balances thoughtful vs. thorough in

the methods. It is likely that each business

line and geography has only a small number

of significant costs. Rather than attempting

complex allocations or even developing

difficult-to-maintain activity rates for all

costs, focus where it really matters.

Spend time with a broad group ofinfluential stakeholders to find acceptable,

more sophisticated methods to allocate

costs as accurately as possible. The less

substantial costs can rely on simple logic.

It will be far easier to gain stakeholder

agreement through this approach, and it

will prove an effective means of balancing

collaboration with top-down direction.

Most stakeholders will appreciate inclusion

and will feel valued by bringing their

insights into the process. As a result, the

waterfall will not be seen as complexcalculations and they are more likely to

champion the initiative, leading it towards

success.

Once the company has the numbers, begin

an iterative process of validating them with

the stakeholder group. Not only will they

help identify potential flaws in allocation

logic, but also they can pinpoint some

underlying inconsistencies in billing or

invoicing processes that result in inaccurate

inputs into the models. These inconsistencies

will either need to be addressed or worked

around to ensure the model represents the

true state of the business.

A critical element to the waterfall is ensuring the base list price is current and

market relevant.

Get Ready: Address issues in the base list price.

Get Set: A base list price aligned to strategies and segment goals enables the

discount analysis required by the sales force to effectively negotiate with

customers and it minimizes risk for erroneous conclusions when comparing

the discount bar of the waterfall.

Now Go: Begin the journey of true profitability through Waterfall Creation


8/12

A leading oilfield services provider recently put this approach into practice

for their final and successful attempt at developing a waterfall. From

previous attempts, the company learned that overly complex or manually

intensive cost allocations eventually met with failure. By adapting the

approach to use simplified assumptions as the basis for the logic, their

waterfall effort then allowed them to effectively focus on getting the

more significant costs correct as well as the ability to turn their insights

into actions. Working with key representatives from sales, operations andfinance, the provider was able to develop reasonable, understandable cost

allocation methods that everyone could support.

After reconciling to the overall profit and loss statements, an iterative review

process of the resulting models further enhanced the organizations comfort

levels with where costs were being pushed down, leaving the critical decision

makers open to acting upon the insights gained. In fact, many of those

involved early in the process became outspoken champions of the profitability

initiative as it deployed to other business lines and geographies.

7

Value realizationA waterfall is useful only if it results in

actual improvements. The model may tell

where to focus attention, but once the

company knows that, it is time to act on

the most promising opportunities. Typicallythe common barriers to realizing the

benefits are lack of direction, doubts about

the ability to actually produce outcomes,

and a general lack of time to pursue new

opportunities.

However, some simple practices can help

companies achieve more significant and

sustainable benefits, and in a manner that

builds support for the new profitability view

across the business. Moreover, with these

best practices in place, companies canmake value realization a permanent feature

of doing business, one which everyone

actively takes accountability.

Rather than setting an ambiguous goal

of simply improving profitability, the first

step to generating benefits is establishing

firm, attainable improvement targets based

on both benchmarks and internal analysis

of potential opportunities. In addition,

these end-goals need to be well known

across the organization and incorporated

into the overall business agenda. It is

paramount that leadership engages in

regular communications on the progress

the company makes toward its goals, with

clear visibility to executive sponsors and

functional leads.

Building a value realization review into

monthly leadership meetings, or even

establishing specific value realization

touchpoints, can help the business keep

moving toward objectives. It is advised that

those objectives are continually reviewedand updated as the business improves and

the market changes. Without this attention

to goals, employees tend to fall into their

normal routines and may not reach for the

potential opportunities.


9/128

The second step is to set up a team who is

responsible for achieving these goals. This

team will be much more successful if it has

in-depth knowledge and support from all

the major functional areas likely impacted

including marketing, sales, corporatestrategy, operations, logistics, supply chain,

finance and IT. This broad base of expertise

will not only foster a better understanding

of how to act on opportunities, but will

facilitate the identification of significantly

more.

If opportunities emerge that involve an

underrepresented or even unrepresented

business function, the team should

involve that function in the opportunity

identification process. Gaining this kind

of internal support removes potential

barriers to realizing value. Also, to support

making this effort an ongoing component

of the companys culture and operations,

as well as bringing in fresh perspectives,

companies should cycle new members from

the business into the value realization team

every few months.

As this team and the remainder of the

business are acclimating to the value

realization effort and overall changes in

how they view profitability, some pushbackwill naturally occur. At this critical adoption

point, initiatives that require extensive effort

or prolonged time-to-value are not going

to win support. On the other hand, if the

value realization team prioritizes quick wins

that achieve significant benefits rapidly,

stakeholders will be inclined to champion

profitability efforts earlier.

Likewise, prior to starting any initiatives, the

team must work with each functional area to

estimate the benefits for each area as well as

the efforts required. This approach will help

the team to best understand ways to build

support upfront, before delving into more

involved and longer-term efforts. This will also

help with broadening the overall profitability

effort to other areas of the business.

In recent years, several leading clients have followed these guidelines

to jumpstart adoption of, and benefits generation from, their waterfall.

Accenture has often helped drive this process, with leadership setting

the stage, being involved from the very beginning and setting up value

realization teams from all functional areas, including off-site plant

operations and sales offices. For a typical client, those selected for these

teams are expected to spend at least five to 10 hours a week focused on

value realization, and their normal responsibilities are adjusted accordingly.Once these teams identify a number of opportunities, the business leads help

select those with the best trade-off between benefit and effort, and then

shift implementation to the appropriate groups.

When putting this approach in action, the companies involved soon start

realizing benefits, but this tends to work best if the value realization teams

are suitably rewarded. Continuing the process, Accenture will help lay the

groundwork for our clients to cycle new team members at regular intervals.

In many cases, the clients we have guided along this journey not only met

but exceeded the initial goals they established. Some even exceeded initial

profit improvement targets by as much as 50 percent, building considerablesupport for the profitability initiative among key stakeholders.


10/12

IndustrializationOnce the company has its models, and has

begun leveraging them to generate actual

benefits, many employees may wonder how

they can sustain the initiative. At the same

time, fears may be high that the entireprocess may need repeating every quarter

or month, depending on refresh needs. A

company also may have a list of changes

that stakeholders want to incorporate after

using the waterfall, or there may be new

data sources to enhance the allocation

logic. How can executives be sure that all

of this is incorporated without introducing

errors that may compromise confidence, or

result in a cumbersome update process?

Start with the basics. Throughout theentire process, maintain and update clear,

concise documentation. This will allow

the company to understand the goal and

function of each part of the model, and

provide for an easier transition to resources

who may take on responsibility for it.

Moreover, clear documentation will allow a

more streamlined and efficient validation

process, allowing the right resources to

easily confirm or find errors in the model

prior to its widespread dissemination.

Once documentation and validation are

established, a change management process

will prove necessary. Similar to the way

software developers address multiple

changes in a single patch, schedule and

prioritize alterations to the model, providing

ample time to fully test and prepare the

organization for the new or different

features. It is best to not reactively address

every change request as it comes up since

these actions may serve as an incubating

ground for introducing errors. Similarly,investigate new data sources thoroughly,

and resist incorporating if requirements

involve high manual maintenance, or

introduce a wide disparity of approaches

across business lines and geographies.

Often companies ask whether this type of

effort should result in a technology solution

for true sustainability. This will depend on

specific needs and the complexity of the

models. While a company may have begun

Recently a global beverage company embarked on creating a new and

consolidated waterfall following a large merger. While the waterfall was

able to address and support key initiatives for the company, the after

effects of the merger resulted in allocation logic having to bridge multiple

systems and account for a myriad of processes. In addition to sustainably

weaving together these varied data sources and inputs, the brand needed

help streamlining disparate pricing management, approval processes and

field communications, leading it to leverage a major packaged technologysolution for pricing.

Through this transition, the documentation the company provided allowed for

much faster speed-to-value, and limited the costs of the industrialized solution.

the journey with a proof-of-concept based

in a simple spreadsheet, as the model grows

to encompass more of the complexities of

the entire business, it is unlikely this will

remain sufficient. However, it may not

require the biggest and best solution outthere. Some companies even find success

outsourcing the process to a third party.

The key to making the right decision is to

embark on this path prior to selecting the

way forward. To find what works for the

company, assess the design with existing

tools and capabilities. Once the full scope

is understood, think about making a

technology investment. This will help the

company be better positioned to understandthe true value each solution provides.

9


11/12

Conclusion

Companies across multiple industries are being driven to negotiate much more complex and

intricate deals, causing them to lose touch with the ability to quickly and easily measure

true profitability. Some companies have made numerous attempts to regain the appropriate

levels of visibility only to stumble into the typical barriers and pitfalls. The high performing

businesses that learn from these obstacles, establish broad support, validate the results

continuously, focus on objectives, support outcomes, and make intelligent choices to sustain

the process realize their achievements and overwhelming levels of success.

The benefits from reconnecting with this key metric are both broad and substantial,

spanning customer and product strategies, as well as pricing and cost reduction tactics.

Assigning the right resources to the right areas can prove a true competitive advantage

for the long run.

10


12/12

Copyright 2013 Accenture

All rights reserved.

Accenture, its logo, and

High Performance Delivered are

trademarks of Accenture.

ContactsFor more information about applying a

waterfall pricing approach in your company,

please contact:

Anthony [email protected]

Ray Florio

[email protected]

Tiago Salvador

[email protected]

Hyun Suk Oh

[email protected]

About AccentureAccenture is a global management

consulting, technology services and

outsourcing company, with approximately

266,000 people serving clients in more

than 120 countries. Combining unparalleledexperience, comprehensive capabilities

across all industries and business functions,

and extensive research on the worlds

most successful companies, Accenture

collaborates with clients to help them

become high-performance businesses and

governments. The company generated net

revenues of US$27.9 billion for the fiscal

year ended Aug. 31, 2012. Its home page

is www.accenture.com.

About Sales & CustomerServices (CRM)Sales & Customer Services (CRM) helps

companies acquire, develop and retain

more profitable customer relationships.

We offer a broad range of innovative

capabilities that address every aspect of

the customer experience, including pricing

strategy and profitability assessment,

customer analytics, direct and indirect

sales force execution, customer service,

field support, customer contact operations,

and retail/branch operations. We use

these combinations of skills to help our

clients accelerate growth, improve sales

productivity and reduce customer-care

costshelping increase the value of theircustomer relationships and enhancing the

economic value of their brands.

accenture competitive pricing harnessing power waterfall model

Documents