Deciding when to eliminate an unprofitable customer can be a difficult choice that isn’t always black and white. The real question at hand here is deciding IF a customer should be eliminated when it’s costing your company substantial profit loss. A number of factors must be evaluated to determine a customer’s true value to your company. 

A Harvard Business Review case study written by Robert S. Kaplan, Baker Foundation Professor at Harvard Business School (and Acorn board member), presents an excellent example of the issues surrounding customer rationalization. The fictional narrative in “Case Study: When to Drop an Unprofitable Customer” showcases the interactions and developments between a long-time customer and its supplier.

Early 2012 saw signs of a recovering economy. Yet, despite these encouraging signs, many companies continued to struggle. Sony recently reported that it plans to cut 10,000 jobs due to significant losses. Sears and Kmart have announced they would close more than 100 stores in 2012 due to declining sales, and it wasn’t that long ago when big box retailers Linens and Things and Circuit City closed all of their store fronts.

The fact that businesses will fail is an inevitable truth. Some will be out-executed while others will suffer from lack of vision or subpar management. While each failed company likely suffered from unique issues, there are often consistent warning signs businesses can look for to determine whether change is needed to address a weakness and enable future success.

We are very excited to announce that two of our customers, Navy Federal Credit Union and Comerica Bank, will lead presentations at the AMIfs Annual Conference for Profitability, Performance and Risk in Phoenix, AZ, April 25-27. 

Both sessions will feature how Acorn Systems’ profitability and cost management solutions are driving better operational decisions and significantly improving profitability results.

See below for details on the two sessions:

Last week, I talked about a few of the biggest mistakes companies make when attempting to maximize profitability—firing unprofitable customers, making a sale at any cost, using gross profit to measure performance, and trying to provide too many goods or services to induce your customers. Today, I’m continuing the discussion with other ‘deadly sins’ companies commit when trying to weed out inefficiencies and maintain competitiveness. Let’s keep the ball rolling with number five.

5: Squeaky Wheel Gets the Grease
Many companies choose to only evaluate the performance of unprofitable customers and products, ignoring what their profitability information is telling them about how they can improve performance with both marginally and highly profitable customers.

Hanging above the door at a steakhouse in San Francisco is a sign that reads:

If you’re so damn smart, then why ain’t you rich?

The sign always elicits a smile, but it wasn’t until recently that I saw the sign in a new light; it dawned on me that this question is also applicable to the business world. In my eight years with Acorn, I’ve done my fair share of profitability assessments on businesses of all sizes and all industries. Day in and day out I see highly intelligent people running companies who are completely missing the mark when it comes to profitability. There are many mistakes on the path to profitability that are made with good intentions, but are best avoided. In part one of “7 Deadly Sins of Profitability,” I outline some of the most common fallacies companies turn to and offer alternative solutions that can help companies reach the desired level of profitability.

It’s human nature to ignore or hide from problems, in the silent hope that they will disappear by themselves. On the contrary, when you ignore problems they tend to quickly snowball - often with dreadful results. Instead of ignoring the elephant in the room, it’s best to take action and look for possible solutions; however, that is often easier said than done.

We find many elephants in the companies we meet. In particular, we’re seeing many organizations struggle to effectively manage their shared services. The idea behind shared services is to create centralized service centers that become more efficient at providing such services, in part by automating various components.  Many organizations struggle to allocate shared services to the business areas in an efficient, equitable and transparent manner. They find it difficult to explain shared service cost allocations to business areas with clear visibility to what business services and value they are receiving for the charges they are assigned. This is because many companies leverage shared service cost allocation schemes that are inefficient, manual, and non-specific. The result of this process is a set of cost allocations that lack business logic and transparency.

Jerome Patterson, Acorn’s Chief Marketing Officer, will be attending the Retail Industry Leaders Association’s (RILA) Supply Chain Conference: Logistics 2012 and has been invited to speak on a panel addressing cost-to-serve measurement and analytics.

Jerome will join Carlos Centurion, COO of Riverlogic, a business analytics software company, in “Cost-to-Serve Metrics for Inventory Flow” on Tuesday, February 21 at 2:45 p.m. CST. During this discussion, Jerome and Carlos will address the question of how retailers are measuring and analyzing cost-to-serve and profitability through different flow channels based on source point, product characteristics, transportation, channel, etc. 

Not all customers and products are equally profitable; in fact, 20-40% of them are losing you money. Join Acorn Systems and Senturus on Wednesday, February 15 at 1 p.m. EST / 12 p.m. CST as they host a complimentary webinar on Profitability Analysis and demonstrate how to accurately identify the true drivers of profitability across your enterprise. 

Organizations know they have unprofitable customers, SKUs, product lines, and channels, but they can’t easily identify which ones are sabotaging their bottom line. During this live webinar, Acorn’s VP of Professional Services, Steven Rasch and Senturus’ CEO, Greg Herrera will present bottom-line results organizations are achieving using Acorn’s Profitability and Cost Management software to analyze their true profitability.

In his book Islands of Profit in a Sea of Red Ink, Jonathan Byrnes states that by any measure of a business (dimension), 40% of a company is unprofitable. We have also seen this in the 300+ clients that we have analyzed, many times even more skewed. In fact, for some companies, the most profitable customers (Top 20%) generate 300% of a company’s net profits, the middle 60% is basically break even and the bottom 20% loses 200% of net profits. And the numbers are more skewed the more detailed the analysis; transaction analysis would be more skewed than customer analysis.

If this rule exists in many if not most companies, why don’t companies jump on the opportunity to gain visibility into their business and drive incredible profit improvement? I believe the answer is not so simple, because if it was, companies would clearly be scrambling to do this. (Instead, we see so many companies rushing to implement budgeting solutions because that is a broken process in many companies.) Profit improvement is not a process in most companies. It is something that is done piecemeal at best, it is something that is hired out (consultants) and it is something that over the last 30 years has not been done effectively (meaning that an understood process with an owner was established to make it an iterative and sustainable process in the company) In fact, in most companies that we do business with, their former technology was Excel, with many models of their business and little process connecting the numbers with profit improvement action.

In a 2010 survey by CFO Magazine and Duke University, ‘maintaining margins’ and ‘the ability to forecast results’ were the Top 2 issues facing CFOs. In the 2010 Gartner FEI Study, the ability to measure customer and product profitability was the top concern for C-level executives. And yet, virtually every time I meet executives to discuss our ability to deliver customer, product, and every other dimension profitability, the most common response I get is “we’re already doing that”.