Profit improvements – 4 big levers

On 10 November, our media specialist corporate finance team will be running a workshop on how to maximise value for sale. Ahead of this, Chris Matthews of Sutherlands, who will be exploring the crucial points to be aware of as a seller at the workshop, has put together his 4 big levers for profit improvement: 

When you come to sell your business, you obviously aim to maximise your profits.  And generally, you get faced with glib opinions like this: “There are only two ways to increase profits – grow income or reduce costs”.

It’s true at a most basic level, of course, but it’s one of those phrases that is really unhelpful because it acts to close down creative thinking about the challenge. I prefer to think about 4 big levers of profitability instead, which open up thought rather than squashing it. Here is an abbreviated overview of each.

The first lever is also the biggest, the one with the greatest potential to increase profits, and is the one that many don’t bother with, or never find the time to use:

1.      BRAND

Explaining to marcomms people why brand is important should be an exercise in teaching a granny to suck eggs. And yet, ask yourself these four questions about your business:

  • Do you have a clear area of genuine expertise that truly differentiates your business from other firms (and do you actually know more than your competitors, and have proprietary processes that help demonstrate your expertise)?
  • Is your brand a beacon for the best talent, or are you competing with everyone else out there?
  • Does your firm have shelves groaning with awards (I speak as a Sword of Excellence winner and the firm I’m non-Executive Chairman of has 19 global awards for excellence in reception)?
  • Is your productivity (Gross Profit / Number of FTE staff) in the top decile of the Kingston Smith annual survey?

Truth is, too many firms out there say they are the best, along with everyone else who says they are the best, too. Too many firms don’t properly articulate what it is they are the best at. In fact, too many firms look pretty much like every other business, and when you look at the productivity numbers – the market’s sense of what they are worth – it’s obvious they have not taken their brand seriously enough.

And this will cost you a ton of money in missed profits.

2.      STAFF

In the run up to a sale, more than ever, you need to have a team of well-motivated, skilful, hard-working people, all pulling in the same direction.

When I visit businesses, I am regularly told that “X” – usually someone important and well paid – is not pulling their weight. Frequently one of life’s ‘difficult’ characters, often they have been with the firm for ages.

I’m of the belief, won through years of painful experience, that if you have the wrong people in the business, especially negative individuals, they have to move on (after having been given one shot at redemption). And don’t hang about…

And if you think the firm is not making the best of its people generally then, above all, don’t ‘nurture’ them. You are not their mum, and acting that way just teaches them dependency. Instead:

  • Challenge them with difficult, complex work;
  • Invest in their careers through training and a clear promotion path;
  • Have a good bonus scheme in place;
  • Inculcate responsibility and accountability.

‘Nurturing’ is a trap that costs money and stifles growth. Avoid it at all costs!

3.      BUSINESS DEVELOPMENT

If you are truly specialist, you should be winning >75% of everything you choose to go after (‘cos you are competing with firms that say they are expert but are not).

Here are 6 steps to nailing this crucial area of growth and profits:

  • Have a campaign-based, lead generation plan. Not something ad-hoc, aimed at no specific client type in particular, but something that bashes out warm leads, month in month out, like clockwork;
  • Improve the pitch process. If you are still using consultative techniques, you should know the world has moved on to challenger / insight methods. If you rely on a few rainmakers, you might want to rethink this area;
  • Hang on to existing, profitable clients. Work hard, with formal processes, care and attention, at keeping them. Winning new clients whilst waving goodbye to others is Sisyphean;
  • Think BIG. It really is worth going after bigger, more strategic work. If you keep fishing in the same small pond, you will never prosper. Think small = stay small;
  • Monitor KPIs. You need to know where to invest, to improve your marketing and sales. Without monitoring KPIs, it’s a bit of a gamble as to whether you are fixing / improving the right things. And extend this to working out what makes your “best” clients best, so you can try to replicate those factors with others;
  • Key client reviews. It’s hard to find the time to do this properly. So here’s a tip: just set aside one day a year as KCR day and insist that’s the day everyone presents their plans. It may be a day of pain, but at least the job gets done.

4.      OPERATIONS

This is a matter of constant fine tuning, to make sure everything is improving just that little bit, day by day. It soon adds up.

Here are some thoughts on three areas to tackle:

Internal costing

A creative function can be a huge asset, but if you are not careful they can be a money pit, as creatives sometimes put in Rolls Royce efforts for Skoda fees. However, it’s not always the creatives’ fault that profits seep away. If account directors under-quote the job and there’s not transparency of internal pricing, then the “over-run” gets lost or appears to sit in the creative department, when actually it belongs elsewhere.

So make sure staff are properly trained in taking briefs, managing over-runs, and you have an accounts department that produces accurate, prompt, detailed information.

KPIs and tripwires

If you don’t measure it you can’t manage it. True, so true. But in my experience, many firms acknowledge this truth, but don’t apply it when it comes to uncharted territory – opening a new office or producing a new service, for example. Often these things have a bumpy start to life and, as the costs mount and income fails to materialise as it should, you are in a quandary as to what to do. You only have, maybe, some previous experience and a lot of hope (and some fear) to help you along.

What’s helpful here is to set a “tripwire”; a KPI that says if X happens (or X doesn’t happen, if it’s that way around) by Y date then we are going to close it down/change who runs it/invest more money/ whatever.

A tripwire is your best shot at what an objective observer, with no money invested and no emotional attachment, would regard as incontrovertible proof of something. So – if we don’t have £X of client income within Y months; or if they have not secured Z invitations to tender by W; or if they have not reduced their running costs to £P by Q – then the wire is tripped.

And if that happens, you take action. The big danger in doing new things is what Luke Johnson said: “Hope is the enemy of the entrepreneur”. You keep hanging on, wishing and hoping, until the money runs out.

Over servicing

I can hardly believe I’m writing this. Can there be anyone left who does not know how to tackle this problem? If that’s you, then:

  • Get a decent time tracking system. Harvest comes up a lot, I notice (but I’m sure there are plenty of other good systems out there);
  • Use your experience to set proper time budgets for client work and chargeability;
  • Investigate the results.

The results are the difficult bit, as you discover:

a)      Some small clients are too small to make money

b)      Some big clients eat up more than they pay (these are often referred to as “Flagship” clients by their account directors, who excuse making losses by the warm glow that working for mega-corp brings. Years of experience have taught me that this is nonsense)

c)      Some staff are under-employed

d)      Some staff work themselves into the ground.

There’s no magic here, you just have to deal with each issue, one at a time. But deal with them you must – others manage this, so why not you?

Selling your business can be enormously rewarding and so it’s a prize worth pursuing. But you need to make sure you are well prepared, well in advance, and that includes driving to grow profitability.

As always, there’s much to do and time is short, so good luck and get cracking.

 

Chris Matthews, who has started, grown and sold businesses, mentors CEO’s of marcomms companies on the challenges facing them.www.sutherlandspsbd.co.uk