10 Ways Your Company is Leaking Money

Business owners and CEOs always ask, “what types of missed opportunities does a PRISM assessment find?”.

The truth is that even two companies in the exact same market niche have very different business challenges, so while a PRISM assessment is quite possibly the best tool for finding a management team’s undetected revenue and profit improvement opportunities, I can’t say what missed opportunities it will find in your business. That’s the point of the assessment. I can, however, categorize the many root causes we commonly find. Here are 10 that immediately come to mind:

1. Stale strategies

I think business strategies should carry a disclaimer like those you see on investment products: “past performance does not guarantee future returns”.

Management experience and ability to make educated guesses are assets, especially for younger companies, but missed demand shifts or competitor gains mean its time (actually, past time) to revisit old assumptions and invest in research. Research can be costly, but assumptions are almost always more costly.

It’s also worth re-evaluating your strategic planning process which let these problems through your front door in the first place. Having worked with management teams who are shifting from guesswork to more rigorous planning, it’s far more effective when process changes are defined and the need for them is communicated.

2. Lacking knowledge of competitors or ineffectively applying that knowledge

The tricky thing about competitor insights is that there needs to be a deliberate internal effort to not only acquire those insights but also to apply them, or their value is drastically reduced. While this may seem obvious, a quick look at what this requires shows that there are many possible failure points.

  • First, collect insights using internal and external sources. The tactics vary, but generally, you’re looking for information that can be treated as factual and unbiased.
  • Second, the business must synthesize its conclusions from the research, what that means for marketing and sales positioning, and communicate it throughout the business.
  • Third, those decisions must be incorporated into marketing collateral, sales decks, etc.
  • Lastly, the business needs to make sure that each customer facing colleague can effectively present the advantages of the company against each competitor they encounter.

You can see how it’s easy for this process to breakdown, causing unnecessary loss of revenue and profit.

3. Customer intimacy or ineffectively applying that knowledge

Everyone agrees customer intimacy is important, but as with competitor knowledge, collecting and applying customer insights has many failure points. Conclusively identifying the changing or emerging demands is the first hurdle. Applying that knowledge to product and service features, their value propositions, pricing, brand promise, and possibly even channels can be an immense shift. Of course, the market reigns king and failure to adapt has direct consequences.

4. Customers, products, or channels which provide considerable revenue but disappointing profit

I ask every executive I meet if they evaluate profitability by customer segment, product category, and channel. Of those who say yes and where I’ve had the opportunity to probe further, I find many are making an important error: They are not fully attributing costs when assessing profitability.

There tend to be two reasons: it’s deemed too hard or they were unaware of how to attribute it. Regardless, this obscures visibility to where management could otherwise take action and potentially increase profitability.

In situations where there is an issue and it’s acknowledged, there is also the hurdle of not knowing how to solve it. I have seen dozens of these situations and two things have always held true:

  • While it may require creativity, there is always a solution that was acceptable to both the business and the customer.
  • Every head-of-sales complains that management is putting them in an impossible situation and warns that customers will leave. Assuming you’ve done the due diligence and know they are wrong, just be prepared for the internal pushback.

5. Policies or practices in one part of the business creating cost in another

This root problem surfaces over and over. One of my most memorable examples of this is a client whose e-commerce platform roll-out was on-time and on-budget (a source of great pride for them) but resulted in many customers having to call customer service to complete their order. That cost millions annually in new customer service costs, not to mention it created a frustrating customer experience.

6. Activity that cannot be proven essential to short or long-term revenue or profit

Over time a business tries strategies or practices that intuitively made sense, but available data is inconclusive on whether it is valuable to the company or the customer. Managers often leave these activities in place because it feels safer and easier to leave it as is.

Work that does not benefit the company or customer should get eliminated. Period. If you’re unsure whether it is beneficial, design a test or capture data and find out.

Human nature is the biggest challenge when making changes as I suggest here and somewhat ironically, senior executives are not immune to the bias to defend their staff and their work.

7. Incentives that support current behavior rather than desired behavior

The old saying is “reward the behavior you want, not the behavior you have”. This problem gets worse if left unattended, so correct it early when you see it. Pulling the band-aid is one option, but results are often better achieved by making staged changes that simultaneously push sales into the desired behavior and provide them time to adapt and succeed.

8. Unattended sales pipeline

Every business has a sales process where each stage has opportunities that fall out of the pipeline from one stage to the next. If you are not scrutinizing the conversion rate from one stage to the next and finding opportunities to optimize, this is typically a tremendous opportunity to improve revenue. Like compound interest, loss or retention early in the pipeline has a cumulative impact on revenue. If you’re looking for new ways to generate revenue, your best opportunity might be within the pipeline in front of you.

9. Overlooking profit or revenue improvement opportunities because it’s already good enough

One of the most inefficient companies I’ve ever observed actually had 32% EBITDA on over $100M in annual revenue! If you’re wondering why they were seeking an assessment, it was because revenue growth had stalled. In truth, their high-profitability is a testament to the company’s business model but also demonstrates that highly profitable companies should not abandon a mantra for productivity and profit because it’s already good enough. Management was certainly more concerned about revenue growth but thinking of revenue and profit independently is perilous and often results in unprofitable customers, products, or channels (root cause #4 above).

10. An imbalance between demand generation and the company’s ability to monetize demand

Recently I met a CEO of an architecture firm who told me their business is doing well and they don’t need to find business improvement opportunities. The CEO said, “we have more interest than we can handle and we’re even turning away less-interesting projects.” The thought going through my head was “that sounds terrible”.

Creating demand that cannot be converted into revenue and profit is bad. Turns out their revenue per employee is also in the 2nd to last quartile for architecture firms. Here’s the thing: I looked at the firm’s work. It’s beautiful. It’s clear they have a love for their craft and the market knows it. It’s probably why their phone is ringing so much. That said, the objective of running a business is to maximize lifetime earnings and this firm’s quality is a perfect opportunity to just that.

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