Profit Optimization
Optimizing Revenues and Costs
Too often the imperatives to take out costs and grow revenues are not coordinated. Successful earnings growth requires making trade-offs.
Shifting revenue and cost curves.
Are growing revenues your priority, or is taking out cost? Are you willing to take on both? Too often, companies focus on one or the other, or, when they do both, it's uncoordinated and sometimes contentious. Correlations must be understood and strategic questions must be answered. Decisions and trade-offs must be made.
Is all revenue good?
Are you selling into profitable agreements?
Are you prepared to walk away from low margin accounts?
Are you informed enough to deliberately shift our book mix toward more profitable customer segments?
Are sales incentives aligned to profitability goals?
Are you conceding too much in the near-term for the hope of long-term benefit?
Is all cost bad?
Are you targeting absolute or relative cost reduction?
Is the goal margin expansion or cost-takeout?
Is leadership aligned to a scenario where revenue growth requires costs to increase, albeit at a slower pace than revenue?
What are the long-term implications of revenue growth and expense reduction?
Are revenue and cost targets aligned to growth or exit strategies?
Is service delivery or customer satisfaction at risk?
Will lack of investment leave the business vulnerable down the road?
Other considerations
Are there other factors that need to be considered based on your business model? E.g., investment income, capital adequacy, rating agency ratings, the derivative value of a customer, vertical integration opportunities, or other factors that contribute to your company's earnings and valuation.
What to do?
The first step is to gain agreement among leaders. That will allow you to move at pace and get the entire company aligned to shared objectives. From there, you'll be able to employ tried and true approaches to growing revenues and reducing costs to optimize profitability and earnings growth.
Levers to Pull
"Grow revenues and cut costs!" If only it were so easy. Too often, knee-jerk responses like broad-based staffing cuts and low-margin sales look good in the short-term, but don't drive sustainable earnings growth. Working through these revenue drivers and cost levers in a coordinated way will help you achieve better results.
Revenue Drivers
Strategic sales: implement high-value client targeting and acquisition approaches.
Product innovation: develop and go to market with new offerings to meet changing customer needs.
Data and technology monetization: use market and customer data (within ethical and legal bounds) to benchmark and create new revenue streams and enhance existing ones.
Market expansion: enter or grow into new geographies or customer segments.
Client rationalization and book mix shift: redefine customer segmentation and target book mix; shift exposure toward more profitable groups.
Offering portfolio rationalization: discontinue unprofitable offerings to focus resources on more profitable ones.
Pricing optimization: adjusting pricing strategies to maximize revenue in concert with differentiating capabilities.
Distribution and customer acquisition strategies: develop targeted marketing, sales and distribution approaches to attract new customers more efficiently.
Strategic partnerships: collaborate to expand access new customers or acquire or combine capabilities.
Customer experience enhancement: systematically design and improve the most important customer interactions to drive retention, loyalty, and value.
Grow wallet share: increase revenue from existing customers by offering complementary or higher-tier products/services (cross-selling and upselling).
Vertical integration: expand into upstream or downstream elements of your value chain to capture additional revenue streams, increase market control, and improve margins.
Cost Levers
Process optimization: eliminate redundant steps, reduce waste, improve consistency, streamline handoffs, adjust frequency of process steps, and implement continuous improvement cycles..
Digital transformation: use technology and computational AI to automate processes, reduce manual work, and improve decision-making.
Organizational restructuring: adjust span of control, align roles and accountabilities, reduce redundancies.
Shared services: centralize support functions across business units.
Location strategy: optimize the placement of operations, considering labor costs, tax, proximity to suppliers and customers, and infrastructure quality .
Outsourcing non-core functions: focus internal resources on value-creating competencies.
Strategic sourcing & supply chain optimization: aggregate demand, consolidate suppliers, streamline logistics and lower procurement costs.
Financial restructuring: refinance debt, optimize capital structure, or improve working capital management.
Talent management: improve engagement, career pathing, and mobility; implement performance-based compensation, reduce unwanted attrition, recruiting costs, and cycle time for key hires.
Asset optimization: improve utilization of existing assets and technologies, selling or repurposing underutilized assets.
Optimizing inventory: reduce carrying costs while maintaining service levels.
Energy efficiency: reduce energy consumption and associated costs.
Zero-based budgeting: review and rebuild all expenses from scratch each period.
Need help?
Putting all the puzzle pieces together isn't easy. Schedule an appointment to talk to us about the problems you need help solving.