How to focus on the right things in your business
Feeling stuck? Swimming against a tsunami of demands with no hope of moving forwards? You’re not alone. Many of the CEOs I coach are struggling to see the wood for the trees. Particularly at the moment. The economic crisis of recent months has produced an overwhelming workload. Business leaders are feeling burnt out and exhausted.
Never has it been more important to step back and get clarity on what’s really important. A small investment of time now will make a massive difference to your future success. And it will help you steer through the rough stuff into calmer water.
Work out what really drives your business
When they first come to me, I find most clients have no real strategy. The thing that’s often missing is a long-range intention. They’re only planning twelve months ahead and projected budgets are incremental. There’s little allowance or thought given to future changes in the business environment or industry. Without knowing who they are, why they’re here and where they’re going, there’s little momentum or sense of forward movement. That’s why we always start with purpose, core values and BHAG – they’re vital.
Companies with a strong long term intention become iconic. They aren’t just admired for their product or service. It’s the way they go about their business that resonates. When people tell me they’re in a war on talent, I tend to raise an eyebrow. I don’t think they are. Not really. The reason they can’t attract good people is no one really knows who they are or why they’d want to work for them. So it’s a huge effort to attract people.
Having a long term intention is about building a brand. And while you’re at it, working out your exit strategy. What’s the point of building a business if you’ve no idea of the end-game? Some of my podcast guests have given their businesses to their staff. One of them, Simon Biltcliffe (CEO of Webmart) has used a ‘Marxist Capitalist’ business model and sold the business to an employee trust. His aim is to turn his employees into entrepreneurs with spectacular results.
Choose the right structure
Getting the right structure in place can make or break your business. You need a framework for strategic execution. Will you opt for a strong matrix or strong silos? Decide where on this continuum your business is likely to fall. For most of the businesses I coach, I recommend moving towards a matrix of small, multi-disciplinary teams rather than the more traditional functional structure of Finance, Marketing, Sales etc. A ‘Team of Teams’ approach will mean you’re less likely to lose your customers at the boundaries between departments.
This approach was central to our growth at Rackspace. We became a matrix organisation with multi-disciplinary ‘pods’ focusing on specific customers. Each team had a Level 3 Windows or Linux engineer depending on the customers’ operating systems, meaning customers had expert support whenever they needed it. Also in the team was a dedicated Account Manager along with ops and salespeople. The teams had daily huddles where they discussed what was happening today or tomorrow for each of their customers.
Make culture a part of your strategy
Don’t fall into the trap of ignoring the importance of company culture. Bring it into your overall strategy and make sure it’s aligned with your long term intention. I’ve written extensively on how to build the right culture for growth – my last ten blogs alone have concentrated on the features that make for a powerful culture. There’s no doubt it’s hard to change, but it’s possible with effort and planning.
Because culture starts within individual teams, it’s easier to influence with a matrix structure. How often have you worked in an organisation where the culture in Finance isn’t supportive of the culture in Sales? So they end up fighting each other. Or you’ve got the Distribution arm in internal conflict with Customer Service? It’s much more difficult to stamp this out in a siloed structure. A team of teams approach will allow you to focus more easily on customers rather than internal ‘pet projects’.
Get to grips with goals
It can be really challenging to change a vision into reality. Maybe you’ve worked hard on creating a ground-breaking new strategy for your business. Executing this is a whole other story. Difficulties with execution are often down to poorly defined goals. People don’t challenge each other. What use is it to decide that Sales will grow by 10% but not work out how and what this might look like?
This happened to me all the time in my early career. ‘Here’s your target Dom’, my manager would say. ‘Increase sales by 10%’. But where was the plan? Where were the increased leads I was going to need and how would I know if I was on course to succeed? So often annual budgets are pulled together by Finance with figures plucked out of fresh air. There’s no business model. Nothing is properly worked out. And, as a result, staff continue to waste time and money on things that make no contribution to overall growth or direction. It’s not enough to set a goal. You also need a clear idea how you’re going to achieve it using product or customer profitability analysis.
Dig into your data and set up metrics
Generally, my clients know what their revenue or profitability numbers are but there’s no concept of what drives that profit or what takes up resources. The solution is metrics. In all the companies where I’ve been MD, we’ve taken the total salary bill for customer support and divided it by the number of tickets. This gave us an average cost per ticket. As soon as you start to do this, it will tell you something. By digging down to a more granular level, you’ll start analysing customer groups.
The revelations come thick and fast. Some customers are really unprofitable – in fact, they’re losing you money. They massively contribute to your overheads. Others are hugely valuable. You can use the current economic crisis as a wake-up call to re-set your business. Work out what’s profitable, and what isn’t, and how many staff you really need. It’s staggering to witness businesses who’ve furloughed half their staff come to the realisation that they can run their business without these people.
Meaningful metrics allow you to look at your cost base and work out how much you need to serve different types of customers, products or deliveries. Most of my clients have no idea what this looks like when we start. There’s no sense even of where their customers have come from. We look at their marketing – maybe there’s a big focus on social media. I ask them what proportion of their recent wins have come from this channel? Either they don’t know or, worse, they tell me zero. So why are they doing it? Perhaps they know they get lots of word of mouth referrals. So I ask them which customers give these? Again, they don’t know. They need NPS® – another fantastic metric! If you don’t have the right data, you’re never going to make meaningful decisions.
Work out your core customer
This takes us on to the million-dollar question. Who is your core customer? What job have they hired you to do? Don’t skip over this. It deserves time and space so that you get it right. Your guiding principle should be, ‘Who are the customers that will buy from us at maximum profit?’ Most of the time, my clients haven’t worked this out. Since they started trading, they’ve grown organically and attracted a broad array of customers, all looking for different things. They’re stuck in a cash/execution cycle – they don’t want to get rid of people so they can’t get rid of revenue. Strategic decisions need to be made – what if they served fewer customers better with fewer people? This would enable them to narrow down on the Core Customer that will ultimately drive their growth.
This is all about profitability. At Peer 1, we realised the top 5% of our customer base was generating 60% of our revenue – that’s massive! These were our most important, core customers. And yet, over time, our business had been built on customer numbers driving staffing volumes. So only 6% of our resources were serving this highly profitable cohort. Decision time!
We split our customer base into three distinct groups. The low-end customers were spending less than $1000 per month with us and there were loads of them – 13,500 to be precise. Not only were they unprofitable but their business was shrinking by 1% per month. We worked out that if we lost them all, we would only lose 10% of our overall business. So we stripped out a large number of staff who were serving them and re-deployed them onto our more profitable core customers. We’d worked out that these customers were growing at 4% per month. This had a deep and lasting effect on our success.
What is it that makes you money?
Sounds pretty obvious but do you know what it is that makes your business money? Too often there’s confusion around this. When I’m trying to clarify this, I use the example of Dell. Their entire growth was based on receiving their revenue from clients 22 days before paying their suppliers. They made this deliberate move after they’d analysed when they got paid. A great tool comes into play here called the ‘Power of One’. I use it to show clients what a 1% change in revenue will do to their profitability over time. Or a 1% reduction in their costs. You can change age payables and receivables by one day and model this to see the impact.
Clients are often amazed by the difference small changes can make. A while back, I met with one of them to look at why they weren’t making enough money. We analysed their cost base but, even after some firm massaging, we still couldn’t get their margin anywhere near where it needed to be. So, I suggested putting their prices up. Their knee-jerk reaction was, ‘We can’t put the price up. Sales will complain! The customers will complain! We’ll lose business.’ Eventually, I persuaded them to try an increase of 1% per month. That was a year ago and they’ve continued with no detrimental effect on their business
A year on and their bottom line profit has dramatically improved. Yes, their cost base has increased as you’d expect with the usual rises in overheads, but not as much as their profit. If they hadn’t put their prices up at all, they would have found themselves going backwards.
Map out priorities
So often, making progress is about doing fewer things measurably better. Working out the real priorities and sticking to them. I use Shannon Susko’s ‘3HAG’ approach to help with this. If you work through her attribution mapping and activity fit map, you’ll be in a position to identify ‘swim lanes’ of work that are linked to your strategic differentiators and priorities. Your top three to five priorities for the next three years will be focused on your core customer and, within these, you’ll have your top priorities for the next year and also 90 days. All of these will link together, giving you a clear direction of travel. I just love the simple clarity that this brings to my clients.
When we’ve got to the end of this process of prioritisation, people sometimes ask, ‘But when do I do my work?’ It starts to dawn on them that what they’ve been doing up to now is wrong. And it needs to stop! From that moment, they need to re-focus on the strategic priorities and nothing else. I’ll never forget my time at Meditel when we reduced our 220 staff to 99. Six months later, no one could work out what these people had been doing. They certainly weren’t missed.