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Perpetuating Mediocrity
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Perpetuating Mediocrity
Author:
Steve Anderson
5/20/2009
There are so many ways to allocate costs and calculate operational profitability, including the use of standard costs gross profit, EVA and activity-based costing. It is not surprising that virtually every business in the world would claim that they are doing some sort of profit and cost analysis. Twenty years ago and more, it was a good excuse that due to lack of organizational data, the KISS (Keep It Simple Stupid) method was the way to go in calculating enterprise-wide profitability numbers. Given the explosion in enterprise data and the use of applications like SAP, Oracle and others, very few companies have the “lack of data” excuse any longer and if they do, calculating enterprise profitability is the least of their problems.
Why do so many companies continue to calculate operational profitability (by customer, by product, by segment, etc) in such a way that the numbers are easily challenged and thus rarely used? Why is it still okay to implement a profit analysis solution that is not operationally validated? Unlike ERPs, supply chain systems and CRM systems, why is it okay for profit analysis solutions to be split into strictly functional silo views or single dimension views (just customer profitability, just product profitability) rather than enterprise-wide implementations with one model giving a company a consolidated operational PROFIT view of their business, just like their ERP gives them a consolidated financial view?
To answer these questions, we have to look historically at what technology has been available and what companies have been in the cat-bird’s seat doing the profit analysis. Politically within a company, it is ALWAYS easier to implement a silo solution for the owner of the silo than to go to other groups and get buy-in. If I’m a new head of sales and want to understand customer profitability, it’s easier for me to commission someone in my group to do this than to try to tackle an implementation for the entire company. On the consulting front, it is much more profitable for management consulting companies to charge a company for a snap-shot view of profitability than to build something that the client could continue to use. Similarly for consulting companies, it’s much more profitable to bite off $3-5 million projects like SKU rationalization, customer profitability, product profitability, shared service costing, IT charge-back than to do the analysis for the company one time and leave behind a solution that provides a consolidated view of operational profitability across all dimensions and processes.
Finally, most C-level executives grew up with the failures of all the above allocation methodologies. They’re tainted. A new breed of CEOs and CFOs will need to come in. They will be a process and data-driven group because they are accustomed to technology and its value. And they won’t be satisfied with KISS or spreading costs based on revenue or using gross margin to analyze their business. They will expect their PROFIT analysis to be like their other enterprise applications – it should model how their business actually works, scale to their volumes and provide information broadly and deeply so that companies can make better, more profitable decisions. Then the mediocrity that we see across the world in enterprise-wide profit analysis will be replaced with the ability to understand true profitability in real time and company-wide.
Tags:
operational profitability, profit analysis
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