This could at least be one of the reasons why our clients still experience a need for a turnaround of their commercial departments.Or perhaps company managers have just become wiser after the crisis and respond more quickly and forcefully to a lack of profitability than before the crisis when symptoms of illnesses were tolerated to a higher extent. Ideally, you would always adapt agilely and continuously to market conditions and would therefore not need to do a turnaround, but there could be several reasons why you would have to execute a turnaround of the commercial department despite vigilant management.
Transparency is key
One of the primary symptoms of illness in a weakened commercial department is discounts and incentive structures rewarding for selling a lot rather than for selling profitably. The key here is transparency throughout the value chain to ensure you know where you make your money, and discounts and other complicated pricing structures may hinder transparency. As soon as you as manager is not sure of where you make your money, and where you lose your money, you can be certain that you are losing money. Transparency is critical for ensuring that you always know on which markets, customers and products you make your money. It sounds simple, but the number of turnarounds in commercial departments we have carried out in just the previous year alone clearly shows that it is in fact far from simple.
Yes, turnarounds ARE painful
A turnaround will always be painful. It may be necessary, but that won’t stop it from being painful. As soon as your bottom line is bleeding, agile adaptation to changing market requirements will no longer be sufficient. It is time to trim. It is painful because we need to trim something away which you have celebrated at some point earlier in time. You may have celebrated the launch of a new product, which you now have to trim away, because you are not making a profit on it. It may be employees you need to lay off, even though you have previously celebrated the company’s strong growth which made it necessary to employ more resources. In other words, a turnaround will always require cutting away business, cutting away costs. You remove turnover but you achieve a better margin.
How do you stop the bleeding?
There are typically three steps in the process of re-establishing a healthy bottom line. First, it is necessary to stop the bleeding, then you need to re-establish a stable business, and only then can you spend resources on defining a profitable growth strategy. The challenge lies in looking at the business from both a short-term and a long-term perspective to ensure that you do not make any decisions that will end up limiting the company’s growth in the long term, while also creating profitability right now.
Stopping the bleeding is in itself a complex process, which can also be divided into three steps.
The first step will always be to create full transparency in the company’s figures. Which customers, products, markets and channels are profitable? We find that a source of trouble is often the so-called “strategic” products which were launched with a view to create a strategic positioning. The thing is that these strategic products are rarely profitable, and they are often allowed to remain so for a disproportionate amount of time.
When you have created transparency in your figures and an overview of your profitability, your next step would then be to define a run rate. This is the baseline and your most realistic estimate of what you will be able to deliver within the next 12 months without changing anything in your business. A run rate is consequently not the same as a budget as you do not include any growth targets or ambitions in your run rate. You will now be able to define a realistic ambition based on your run rate. There will be a gap between your run rate and your ambition, and you will now be able to work in a targeted manner on closing this gap.
The third step is therefore to select and execute five initiatives for the purpose of closing this gap. My recommendation would be to launch no more than five initiatives that you do not want to end up in a new situation with a lack of transparency and overview. And this is where it hurts. This is where you need to trim, and for this very reason, it is critical that these initiatives are defined and implemented top down as management needs to show the necessity and prioritisation of these initiatives.
Avoid a turnaround of YOUR commercial department
This brings me back to transparency. It takes a lot of luck to succeed with your business if you do not know where you are profitable, and it is an impossible task without transparency. Good commercial excellence is basically about knowing where your business is profitable. Only when you have achieved transparency in your figures, can you be certain that you are implementing the right initiatives, which will keep your business healthy in both the short and long term.
Originally published in Børsen Ledelse.