Commercial turnaround in challenging situations

When organisations find themselves in financial distress the immediate reaction is frequently to look to cost reductions to enhance profitability, as covered in my last article. These have the benefits of being easily defined and controllable, and yield quick improvements to profitability and cash flow.

Cost reduction measures are not the only option for rapid improvements though. Commercial levers can also provide quick gains and help to reposition the organisation, particularly if the correct strategic moves are made during a period of transition in external markets.

Organisations sometimes avoid these improvements because they (incorrectly) perceive them to be too slow or difficult. With appropriate analytical rigour, prioritisation and focus, the gains can be captured quickly.

Commercial improvements with potential rapid improvements include:

· Evaluate strategic situation

· Improve marketing spend effectiveness

· Increase sales force effectiveness

· Enhance pricing and margin management

· Refocus product management

EVALUATE STRATEGIC SITUATION

Is it you or is it the market?

External market factors can rapidly overtake an organisation if it is not monitoring the situation, as I reviewed in a previous article. It is important to understand whether market demand has changed in terms of its overall scale and structure, or if it is your organisation’s market share which has reduced.

If the overall market demand has declined, can you identify geographies and segments which have been more resilient and increase focus on those, reprioritising resources from areas which have become less attractive?

If overall demand is solid, but you are losing market share, are competitors outmanoeuvring you or is it due to strategic shortcomings in your own activities?

Strategic pivots usually take time but some moves can be executed more quickly than others. For example, increasing focus on services can happen quickly – upselling service packages at the time of new equipment sales, and pursuing maintenance contracts for equipment coming out of warranty have yielded significant gains for me in the past.

If your strategic concept and business model remain strong, then it is time to look at improving the efficiency and effectiveness of tactical commercial activities.

IMPROVE MARKETING SPEND EFFECTIVENESS

Are you spending your marketing budget wisely and getting the required returns on the investment?

When trading is strong and revenues are growing companies frequently relax their controls on marketing activities and consequently, total spend can rise without delivering the corresponding boost to revenues and profits – sales teams are always eager to attend another exhibition or conference, but how often is a robust review conducted of the results?

As trading conditions and performance worsen, these spend areas are quite understandably targeted for cost reductions, but often on an indiscriminate basis – taking 30% or even more from the marketing budget wont impact sales, will it?

Well actually it probably will. Possibly not in the next few weeks or months, but if competitors maintain their marketing activities and are more effective with them, the brand awareness of companies which have made indiscriminate cuts will worsen.

Instead consider applying a little more science to understand the effectiveness of the key activities and overall initiatives that the marketing function is undertaking:

· Did the foreign conference yield the forecast number of leads, what proportion converted to paying customers, and what has been the cumulative revenue?

· What was the outcome from the digital marketing campaign and have the new contacts yielded revenues and profitability which justify the investment?

· Has the new agency yielded the benefits promised in their pitch and are these visible in the P&L?

A rigorous review of the individual expenditures from the marketing budget can be illuminating and quickly highlight where, and more importantly where not to, cut costs and even identify some areas in which to expand.

When I have challenged some marketing functions to undertake this type of analysis, they have quickly replied that they do not track their initiatives and the impact they have on potential and existing customers – that is a much deeper problem, particularly given the power and sophistication of modern CRM systems. Other replies I continue to hear is “We don’t have a CRM system” or “We don’t use it to track activities”, which is normally a good indication of potential cost reductions and performance improvements.

Marketing budgets are used in some organisations to hide some areas of ‘promotional’ or ‘development’ expenditure from more detailed scrutiny – again a detailed review will tend to flush these out and can provide quick cost savings.

An analytical approach to optimisation of the marketing budget can yield simultaneous improvements in both costs and the impact achieved.

INCREASE SALES FORCE EFFECTIVENESS

Is your sales team working productively and converting the targeted opportunities?

If revenues have stopped growing, or are even in decline, and there doesn’t appear to have been a structural or competitive change in customer markets, attention needs to turn towards the sales team and assess whether or not they are being as productive and effective as they should be.

Data is critical.

High-performing sales teams will be proactively populating and using their CRM systems to identify and track potential new customers, and to ensure that existing ones are being served well. If a CRM system is not being used in this way it should be an immediate red flag and an indicator of significant improvement potential.

No CRM? With modern SaaS systems, that should be easily addressable and can yield rapid results – I led a pan-European roll-out across 12 countries and more than 20 locations, which took less than 3 months and yielded immediate benefits, which were even referred to by customers.

Once the data is available, simple analyses can determine whether the sales team is:

· Making sufficient calls and visits each week

· Converting these calls into meaningful conversations

· Delivering increased orders

· Earning the anticipated profits from sales (see below)

· Converting profit into cashflow

Sharing the data with the sales team can help them to identify potential improvements themselves.

A personal favourite is to use league tables to aid the comparison – I have often been told when introducing these that they won’t change behaviours within the organisation or that they would be counter-cultural. It is amazing how everyone wants to see where they place each month, and no one wants to be bottom.

Focussing on the available information can very quickly drive changes in performance, and/or start to identify more systemic or capability-based problems which can be addressed.

In one organisation I discovered that a national sales manager was effectively using his deputy as his chauffeur, in-effect reducing the sales team by one head and frustrating the ambitious deputy (as well as others in the organisation). When it was clear that the manager would not change his approach (amongst other challenges), a quick cost saving was captured resulting in an immediate increase in sales productivity.

Helping the salesforce to work smarter and more productively using insights from available data can create a very quick step-change in performance.

ENHANCE PRICING AND MARGIN MANAGEMENT

Are you capturing the optimum pricing and margins from sales?

When gross and net margins start to decline in either absolute terms or as a fraction of revenues many organisations will immediately look to cost reductions from procurement or manufacturing to get them back on track, but without reviewing whether other commercial measures should be taken.

Their logic is that it is easier to put the challenge on to suppliers than ask customers for a price rise.

This misses a crucial improvement opportunity.

Agile organisations will actively maintain a view of overall pricing in the market place and ensure that their headline sales price is adjusted in line with significant changes – quick to increase and slow to decrease if possible.

Equally, if a significant proportion of a product’s cost structure is due to inputs which have volatile pricing (e.g., traded raw materials, energy, etc.) they will ensure that prices are increased in line with costs.

Frequently, if gross margins have been compressed it is because the organisation has not maintained an active pricing review resulting in a cost-price squeeze.

For example, the costs of one of the products of a materials company were heavily driven by its primary raw material, a traded base metal. Over the previous few years the metal price had increased steadily due to increasing demand, but the sales team had not passed on the increases in pricing for fear of disrupting customers (or avoiding the difficult conversations). The margin erosion was picked-up by the main manufacturing plant, and it took the closure of a sister facility to force sales to re-evaluate pricing – a 20% price rise was introduced to customers within one month without any loss of volumes.

Another oft-neglected area is the accurate allocation of discounts and all attributable costs to a sale or an individual product line – many companies collect these in aggregate and do not undertake the detailed allocation. However, when this exercise is undertaken rigorously it can highlight significantly lower margins for individual customers and products.

A building materials manufacturer undertook this analysis as part of their turnaround activities. Once all discounts (volume and one-off incentives), free-issue materials, logistics, packaging, and other indirect costs were allocated to individuals products and customers it quickly highlighted that the worst performing 15% of volumes were actually loss making and reducing total margins by 10%. Price rises of more than 30% were quickly rushed through – even if customers had moved to other suppliers the company would still have been better off as they were losing money with each sale; in the end, only a very small minority did not accept the price increase.

Significant insights can be gained from analysing existing data within an organisation which can highlight substantial and rapid margin improvements.

REFOCUS PRODUCT MANAGEMENT

Do you have the correct portfolio addressing customers’ requirements, particularly in challenging times?

Many of the traits highlighted above indicate organisations that have lost touch with what is going on in the market place and their competitive position within it. Frequently this also means that they have lost touch with their customers’ key requirements.

Whilst product development teams may want to launch ever more sophisticated products and services, if these are not what customers are seeking they are actually just a source of distraction and additional costs.

By using some of the data and analyses highlighted above it is frequently possible to identify new product and service niches which better fit customers’ requirements. This is particularly true if they are facing challenging trading conditions themselves, when ‘just-good-enough’ is sufficient.

In one case, an advanced manufacturing company identified that a significant segment of customers were looking for a very basic version of their current state-of-the-art equipment due to cash constraints. Rather than try to develop a new product, they reviewed their product archives and relaunched an older model which was a strong fit for customers’ needs. Sales grew quickly and established the segment as a key target for the organisation going forward.

Similarly, when cash flow is tight, organisations will seek to extend the operating life of assets rather than replacing them. Offering enhanced service and maintenance packages can help customers out of a difficult situation, and create significant goodwill and deeper insight for when they are in a position to purchase new equipment.

Simple and rapid changes to product portfolios based on customer insights can have a rapid and substantial impact on trading performance during challenging times.

SUMMARY

Good commercial management, similar to good cost management, is a core skill for all organisations irrespective of their financial performance. The levers highlighted above can provide quick and meaningful improvements to an organisation’s performance when they are facing challenge trading conditions.

They are equally valid when organisations that are performing well want to move on to the next level of performance, and seeking the next areas of optimisation.