CIMA BiteSize Briefing
Improving profitability without
cutting costs
Chartered Institute of
Management Accountants
London, Wednesday 27th June 2012
© Bellis-Jones Hill 2012
08:00 – 08:30 Breakfast
08:30 – 08:35 Introductions
08:35 – 09:00 Deploying corporate performance management insights to
improve profitability and manage costs
09:00 – 09:15 How can improved customer value management and pricing
develop improved bottom-line performance?
09:15 – 09:45 How can targeted product rationalisation and customer
segmentation deliver profitable growth?
09:45 – 10:00 Q&A
10:00 – 10:30 Refreshment break and networking
© Bellis-Jones Hill 2012
Agenda Improving profitability without cutting costs
Solutions Provider and leading authority in Corporate Performance Management Consulting & Software
Experts in delivering rapid packaged agile solutions aimed at specific business issues
A highly experienced team used to working with customer organisations at all levels
Clients include: Barclays, HomeServe, Noble, RSA, Skandia, Travis Perkins, Skipton
Introducing Bellis-Jones Hill
© Bellis-Jones Hill 2012
Bellis-Jones Hill’s deliverables
• INSIGHTS
• TRANSFORMATION
• MANAGEMENT
© Bellis-Jones Hill 2012
© Bellis-Jones Hill 2012
Agenda Improving profitability without cutting costs
08:00 – 08:30 Breakfast
08:30 – 08:35 Introductions
08:35 – 09:00 Deploying corporate performance management insights to
improve profitability and manage costs
09:00 – 09:15 How can improved customer value management and pricing
develop improved bottom-line performance?
09:15 – 09:45 How can targeted product rationalisation and customer
segmentation deliver profitable growth?
09:45 – 10:00 Q&A
10:00 – 10:30 Refreshment break and networking
Using corporate performance insights…
© Bellis-Jones Hill 2012
…to improve profitability and manage costs
A true picture of the profitability of your business, by:
#Product #Customer #Channel #Organisational unit
Visibility of your true cost base for all direct and indirect (overhead) costs
Sales structure transparency including revenues, sales prices, discounts &
rebates and true profit margins
Understanding of your:
# Staff / Resource capacities & results # Supply chain fitness
# Competitive strengths # Potential in different markets
Clarity on the scope for performance improvements
A robust framework for continuous measurement, improvement and
management of profitability performance
Using corporate performance insights
to drive business success
© Bellis-Jones Hill 2012
Providing you with an Analytical Stethoscope on what’s driving
the profitability and success of your business…
Profit
Sales Costs
Price Unit Cost
What do we mean by profitability?
© Bellis-Jones Hill 2012
Volume Margin Revenue ROS
ROI
Return Product
Service
Customer
Market
Business Unit
Competitor
Growth Incremental
Sustainable
Loss
Quality
Channel
Discount
Gross
Net Time
Future
Activity
It is important that we all know!
Profitability (ROI,
ROS, etc.)
Growth
Cash flow
Value increase
Shareholder return
Business success
Pricing
R&D/innovation
Product/service
range
Marketing/sales
effort
Distribution
channels
Make vs. buy
Supply chain
Pay and
productivity
Overheads
Synergies
Strategy & tactics
… to understand your business
performance
© Bellis-Jones Hill 2012
Making linkages transparent
© Bellis-Jones Hill 2012
Profitability (ROI,
ROS, etc.)
Growth
Cash flow
Value increase
Shareholder return
Business success
Pricing
R&D/innovation
Product/service
range
Marketing/sales
effort
Distribution
channels
Make vs. buy
Supply chain
Pay and
productivity
Overheads
Synergies
Strategy & tactics
Differentiation
Concentration
Growth
Entry/exit
Capital intensity
Customer
power
Technology
change
Market structure
Perceived value
Scale
Capital intensity
Key factor costs
Position relative to
competitors
Gaining insight on business
performance
© Bellis-Jones Hill 2012
© Bellis-Jones Hill 2012
Agenda Improving profitability without cutting costs
08:00 – 08:30 Breakfast
08:30 – 08:35 Introductions
08:35 – 09:00 Deploying corporate performance management insights to
improve profitability and manage costs
09:00 – 09:15 How can improved customer value management and pricing
develop improved bottom-line performance?
09:15 – 09:45 How can targeted product rationalisation and customer
segmentation deliver profitable growth?
09:45 – 10:00 Q&A
10:00 – 10:30 Refreshment break and networking
Pricing Optimisation Project
Price elasticities
Consumer perceptions
Recommend
Price Strategy
Implement
Model
For each major product line, what are the:
Usage/buying behaviours
Steps 1 - 6 Step 7 Steps 8 Steps 9
© Bellis-Jones Hill 2012
Step 1: Using PSL Pricing DNA tool, establish price elasticity per
product and compare with category database for re-assurance
Category
Involvement
Brand
Commitment
Product
Value
Shelf
Impulsivity
Shopper
Engagement
INELASTIC
LOW HI
• Infrequent
• No flyers
• Lots of Brands
• Brand loyal • Frequent
Switching
• Product most
important
• Price most
important
• Product value
comparison
• Searches for
low prices
• Promo driven
• Expandable
• Try new SKUs
• Not impulse
purchase
© Bellis-Jones Hill 2012
Step 2: Identify key value drivers per product/category for
consumer and weight their importance
© Bellis-Jones Hill 2012
ta Take input from price elasticity analysis
and validate with customer population
Step 3: Score own product (Brand A) v. competitors across key
value drivers
© Bellis-Jones Hill 2012
Step 4: Review the Customer Value Map
Brand A is below the fair value line (potential for price increase)
opportunity
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Step 5: Understand the consumer buying behaviour for Brand A
Bought 2-3 times per year (lack of price sensitivity)
Expandable product so more bought = more
consumer
Product bought as part of a range so needed to
encourage multiple purchases (promotions =
multibuys NOT price offs)
© Bellis-Jones Hill 2012
Step 6: Review pricing research & analysis
Product is value advantaged versus competition
Product category is expandable
Product/category is relatively price inelastic (meaning
any price changes will have limited impact on
volume)
Product is a “must stock” line in this category
(meaning that the retailer will be unwilling to delist it)
© Bellis-Jones Hill 2012
Pricing Optimisation Project
Price elasticities
Consumer perceptions
Recommend
Price Strategy
Implement
Model
For each major product line, what are the:
Usage/buying behaviours
Steps 1 - 6 Step 7 Steps 8 Steps 9
© Bellis-Jones Hill 2012
Step 7: Build a flexible model (can be in Excel) that allows the
modelling of scenarios and takes into consideration
Product profitability by customer (as low as you
can go!)
Customer margin requirements
Cost implication of upsizing/downsizing packs
Key price points
Implications on promotional discounts
Likely volume changes
© Bellis-Jones Hill 2012
Step 8: Price strategy recommendation for Brand A
22% price increase across all customers
New price point recommendations
Retailer % margin maintenance
Increase in overall retailer £ margin (even with
forecast loss of volume)
Promise of greater innovation and investment in
the category
© Bellis-Jones Hill 2012
Step 9: What is needed for successful implementation?
Fair strategy (to all customers)
Strong argumentation for price increases
Thorough understanding by KAMs of the rationale,
numbers etc.
Good presentation (clear graphics, numbers) with
relevant supporting documentation
Clear walk away position
© Bellis-Jones Hill 2012
Pricing Optimisation Project
Price elasticities
Consumer perceptions
Recommend
Price Strategy
Implement
Model
For each major product line, what are the:
Usage/buying behaviours
Steps 1 - 6 Step 7 Steps 8 Steps 9
© Bellis-Jones Hill 2012
© Bellis-Jones Hill 2012
Agenda Improving profitability without cutting costs
08:00 – 08:30 Breakfast
08:30 – 08:35 Introductions
08:35 – 09:00 Deploying corporate performance management insights to
improve profitability and manage costs
09:00 – 09:15 How can improved customer value management and pricing
develop improved bottom-line performance?
09:15 – 09:45 How can targeted product rationalisation and customer
segmentation deliver profitable growth?
09:45 – 10:00 Q&A
10:00 – 10:30 Refreshment break and networking
CPM capabilities are now much stronger than ever before:
The processing power of current technology has changed
what is possible
Software capabilities are much more comprehensive
Latest tools and techniques used in deployments make
for faster implementations and more agile & easier to use
solutions
Cost of ownership has dramatically reduced
All of these are exciting developments that can only improve
management information and decision making.
© Bellis-Jones Hill 2012
Why CPM now?
Moving from … a right state to … “the right state”
New CPM capabilities provide an
opportunity for stronger solutions
Lack of design resulting in non-integrated systems
Robust architecture driving best practice
Lack of data integrity Balance between financial control and business insight
Excessive reliance on manual controls
Data integrity driven by
• common chart of accounts
• common Finance repository
© Bellis-Jones Hill 2012
Investment Appraisal
Business Performance Measurement
Accountability
Strategic investment prioritisation
Customer Profitability
Channel dominance
Inefficiency
Cost Control
PROFIT
ON-TIME!
FLEXIBILITY!
…and the message from the top is clear!
© Bellis-Jones Hill 2012
Traditional Costing Systems
Standard Costing
Absorption Costing
Marginal Costing
All fail to deal with overhead cost and intangibles in a satisfactory manner…… …and give no insight into underlying drivers
Traditional methods of costing share the same
shortcomings:
Only new Activity-Based Costing approaches
(cost to serve, customer profitability and product
profitability analytics, etc.) are able to provide
management with satisfactory answers.
It is ABC principles that drive organisations to
think in terms of processes and value.
© Bellis-Jones Hill 2012
What Is Wrong With Today's
Outlook ? • Today's finance focus is (not surprisingly) almost exclusively on
traditional financial measures
• This is not the language of operational management and ignores
the real causes of performance
• Measurement is directed towards Balance Sheet, P&L cash flow,
budgetary cost performance and high level Variance Analysis
• These measures do not drive value, cost or
performance - they are the final outcomes and give
management little insight into cause... or how to do
better
© Bellis-Jones Hill 2012
Revenue
Where Does Profit Come
From ?
Op Profit / Gross Margin
- Overheads
- Cost of Goods Sold
Profit
(Direct Cost = product costs,
service delivery costs)
(Indirect Cost = sales, marketing,
customer service & support,
order processing, invoicing, etc.
In fact almost all customer
driven costs!)
© Bellis-Jones Hill 2012
Fallacy Of Today’s Cost
Measurement
(Direct Cost)
(Indirect Cost)
Low Discretion
High Discretion
Measured closely, in detail and usually
accurately
Measured only at high level and often
inaccurately
© Bellis-Jones Hill 2012
The Nature of our
Processes & Activities
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Process
What do we do
and why?
Profit
How can we improve it?
Performance
How well do we do it and
how do we measure?
Unlocking Organisational Insight
© Bellis-Jones Hill 2012
Understanding Processes
As previously stated, traditional financial measures
tell only of outcome. Management needs more
causal information in today’s dynamic environment.
Efficiency is improved and costs reduced by:
i. Decreasing the Cost per Unit of a Driver
AND/OR
ii. Decreasing the Driver Volume
But traditional financial reporting fails to reflect this
© Bellis-Jones Hill 2012
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Activity
Input
Output
Start of Process Every process has
a clear starting point and an output
Every activity has an input or driver from preceding activities
...and provides outputs or drivers to activities that follow
Output
What Is A Process?
© Bellis-Jones Hill 2012
Analysis of activity
Sustaining activity with no identifiable
customer
Strategy Dev’t
Mgmt. Accounting
Budgeting
Treasury
Tax Management
etc. etc.
Activity driven by External
Customers
Sales Visits
Call Handling
Order Processing
Invoicing
Debt Collection
Marketing
etc. etc
Personnel
Payroll
Reporting
Capex Review
I.T
Office Services
etc. etc.
Activity Driven by Internal Customer
Needs
Activity Driven by Products and
Services
Material Acquisition
Supplier Payment
Scheduling
R & D
Design
Marketing
etc.etc
Example Processes
© Bellis-Jones Hill 2012
Customer Service Warehouse Finance
Processes move across the functions in a company
Distribution
Take Order
Negotiate Terms
Sales
Receive Order
Validate Order
Order Entry
Check Stock
Allocate Shortages
Produce Pick Ticket
Allocate Workload
Pick Product
Assemble Order
Pack Order
Produce Advice Note
Plan Schedule
Produce Load Plan
Produce Documents
Load Truck
Despatch Truck
Deliver Order
Receive P.O.D.
Credit Check
Receive Payment
Issue Reminder
Chase Debtors
Review Credit
Clear Account
Order Fulfilment
© Bellis-Jones Hill 2012
Customer A
£18K gross margin
0 debt chases
£0 incurred cost
£18K adjusted margin
Customer Driven Cost
Customer B
£20K gross margin
12 debt chases
£3K incurred cost
£17K adjusted margin
Cost of debt chasing
= £250,000
Number of debt
chases =1000
Average unit driver
cost = £250/chase
© Bellis-Jones Hill 2012
Understanding the profitability
journey
Comparisons of customer level profit needed here
Residual profit
Number of customers
Accumulated
Customer
Profit
Point of maximum negative profit
Point of maximum profit
© Bellis-Jones Hill 2012
Figure 1: The Cumulative Contribution Analysis curve
Understanding the profitability
journey
© Bellis-Jones Hill 2012
Contribution
as a %
of Sales
Positive
Negative
0
ProblemLosers
A
CB
D
WinnersPotential
Low High
Sales revenue per customer
Analysis of customer profitability
Positive contribution
Lo
w s
ale
s v
olu
me
Negative contribution
Hig
h s
ale
s v
olu
me
Contribution
as a %
of Sales
Positive
Negative
0
ProblemLosers
A
CB
D
WinnersPotential
Low High
Sales revenue per customer
Analysis of customer profitability
Positive contribution
Lo
w s
ale
s v
olu
me
Negative contribution
Hig
h s
ale
s v
olu
me
Figure 2: Decision
Grid Analysis
© Bellis-Jones Hill 2012
Agenda Improving profitability without cutting costs
08:00 – 08:30 Breakfast
08:30 – 08:35 Introductions
08:35 – 09:00 Deploying corporate performance management insights to
improve profitability and manage costs
09:00 – 09:15 How can improved customer value management and pricing
develop improved bottom-line performance?
09:15 – 09:45 How can targeted product rationalisation and customer
segmentation deliver profitable growth?
09:45 – 10:00 Q&A
10:00 – 10:30 Refreshment break and networking
© Bellis-Jones Hill 2012
Summary points? Improving profitability without cutting costs
Understanding and managing costs (direct and indirect) is
critical in todays rapidly changing and economically challenging
environment.
Your business and its customer base is developing: use Pricing
and Customer Value Analysis to capture this insight.
CPM capabilities are now much stronger than ever before.
ABC/M deliverables that were technically difficult before are now
much faster and more agile than previously possible.
Segmentation for profit is critical: be selective, systematic and
avoid the scattergun approach.
46
• Bullet point…
© Bellis-Jones Hill 2012