Focusing on the bottom line: Risk and fit
July 13, 2004
Editor's Note: This is the seventh episode in a mountaintop dialogue that Gerald has been having with a "wise business guru." They have been talking about sales training.
"Why does it matter whether the sales staff understands this concept of buying a contract? If they are getting orders and the customer is happy, isn't that enough?" I asked.
My little business guru smiled broadly and said, "Enough it is, of course. There was no need for you to climb all the way up here to talk with me. Just keep doing things the way you have been. I was under the mistaken impression that you wanted to improve the performance of your business." He dismissed me with a wave of his pointy ears and turned to find a comfortable spot in the shade of the bristlecone pine.
"Oh, don't get all bent out of shape. I'm having a bit of a struggle understanding what it is you are driving at," I protested. I was thinking that just having happy customers would be a relief, if nothing else."
"Well, think about what you just said! 'If the customer is happy, isn't that enough?" he mimicked. "If you charge the right amount for your service, both you and your customer are happy. If you charge too little, your customer might be happy, but are you?" I conceded that "enough" should include my happiness.
"Your salespeople want you to evaluate their performance, to base their commission on the gross sales that they bring in. Big dollar volume—is that their indicator of success?" he pressed. I nodded in agreement. "What would happen if you offered them a commission as a percentage of profit instead of gross sales?" he asked.
I shook my head. "I have tried that in the past. It doesn't work, because there are so many factors influencing profit that are out of their control. They always feel cheated."
He pressed his palms together as if begging me to see the light. "I suspect they feel insecure about accepting that offer because they don't know what they are selling. If they were truly adept at negotiation and understood the nature of the contract, they would have no problem boosting the customer's perceived value of the deal, evaluating the risk of the deal, and negotiating the contract price at an optimum level," he predicted. "If the focus were on negotiating a deal for maximum profit instead of on maximum gross amount, how would that affect your pricing?" he asked.
I began to warm to the concept he was presenting. "Yes, I want my sales staff to focus on the bottom line, not merely the top line. The way I offer incentives now, they look only at the size of the contract and never at the risk." He nodded, but not very emphatically.
"Tell me about your concept of risk," he commanded.
I immediately locked onto the idea of risk that I associate with the stock market. "There is a chance that all of the investment will be lost. Past performance is no guarantee of future return "
He propellered his ears to interrupt my recitation of the familiar legal disclaimer. "You are running a job shop, not a brokerage. What are the risks involved in taking an order from a customer?"
"Well, the customer might not pay for the parts," I mused. With an expectant look, he encouraged me to try harder. "We might fail to deliver on time and have to give the customer some kind of discount?" I ventured.
He looked slightly pained, but still hopeful.
"We might goof up and scrap the job and waste material and labor until we get it right?"
"You are getting warmer!" he exclaimed.
"We might blow the bid and have no hope of making a profit?"
"That, too, is a risk. But what I want you to realize—actually, what you want your salespeople to realize—is the risk of fit with your shop. The product may not be something that you should try to build; for example, a job with tolerances that are too tight, features that are too large, or production volumes that don't fit your schedule.
"Even more difficult to deal with than bad product fit is bad customer fit! Some customers are nearly impossible for your organization to cope with. On the contrary, some customers and their projects fit like a glove and will move through your plant without any problem. Easy money and joy for all!" He glowed while contemplating such bliss.
"One of our most frequent complaints about outside sales reps is that they bring in work that we do not want to build," I agreed.
"Even your inside sales force is prone to accepting contracts that are risky, particularly when sales are slow," he warned. "Do you have a training program that explains what the 'perfect' fit is?" he asked.
"Well, not exactly. Most of our inside sales staff moved up through the ranks. They've spent time in the production department operating machinery and building parts. They pretty much know how to build all of the stuff that they see on the prints that come in for bid," I replied. "They can usually spot a project that is a good fit for the shop," I added. I could tell from the way he rolled his eyes as if in a coma while chanting Peter Principle theory that we had stumbled on another opportunity for improvement.
For a little guy, this guru had a lot of nerve. He had challenged my ability to manage cash, inventory, time, and salespeople. He actually had accused me of not knowing what I was selling! He had also poked at my strategy and my tactics. Were it not for the fact that I had asked for his help, I would have shown him the door—except, of course, there were no doors, outdoors, on this mountain. It was his mountain to boot!
"When you first arrived here, you wanted advice on how to fix your cash flow problem," my guru reminded me. "As we have progressed through the concept of the time line of money as a framework for the discussion of cash flow problems, we have found all kinds of things that you might want to change in your organization," he observed.
"That's true, but it seems that when I fix one problem, another pops up. For example, I cut back on inventory and then deliveries ran late. I increased the manufacturing capacity to speed delivery and the cost went up. I raised the prices and the sales went away," I complained.
His eyes narrowed as he seemed to sense a strong disturbance in the force. He pursed his lips and pressed his fingertips together to form a hollow ball below his chin. "Strategy of yours please disclose," he finally demanded.
I was elated that he had finally brought up a topic that I felt I understood. I had produced an Operational Planning Manual a few years back that included a vision and mission statement and represented a detailed implementation of my business strategy.
He beamed at my flushed and happy expression. "A strategy communicates with you?" he pressed. That caught me by surprise. My strategy had always been happy being mute. I certainly did not spend much time talking to it. "How would a strategy communicate with me? You have me stumped again, little guru," I puzzled.
He faced a nearby canyon, cupped his hands around his mouth, and shouted, "Your policies and procedures document the tactics you have set according to your strategic vision. The enforcement of those policies and procedures gives voice to your strategy." The echoing repetition of that message was a clever touch, I thought.
"Great sound effects, but your words are just bouncing around in my head without meaning. How does enforcement allow a policy to speak?"
"I'll come back to your question in a moment," he teased. "For now, consider a work unit."
He directed my attention to an animated picture that was projected onto the nearby cliff from his desktop. These mountaintop gurus really have all of the toys. Three 3-D boxes danced on the "screen."
"These boxes in the diagram represent a work unit." He targeted the rightmost box with his laser pointer. It quivered appreciatively. "This one is the machine." The middle box started jumping. He shot it with his laser. "This represents the operator." The leftmost box then lit up. "And this represents management. How do you suppose they communicate with each other?" he asked.
Next month's issue uncovers more mysterious mountaintop teachings.