How Leadership Can Make Profitability Improvements Stick

Many organizations’ profits are being challenged by compressed margins, growing expenses, flat sales and greater competition. As leaders, it is up to us to have plans in place to prevent that profit erosion and have the data, tools, reports, metrics and strategies to manage through to better results and targeted profitability.

The Role of Leaders in an Organization

There are hundreds of definitions of leadership out there today. I think we can all agree however that a primary responsibility of a leader is to create a vision for the organization, plot a direction and engage the management team and employees to follow that direction through various strategies and objectives.

As leaders, we all have management responsibility too. We build and assemble teams that are charged with executing the vision, the company objectives and meeting and managing the plans that were established.

Tools Leaders and Managers Use

To manage and implement the annual plan there are a multitude of metrics we all use to “manage’ performance. Activity measures and performance metrics as we all know are used to measure the before and after performance, reveal trends, and ensure the organization is moving in the right direction. If performance is off track, the metrics will usually provide the clues and point to the areas that need course corrections.

Performance metrics are absolutely critical to businesses and many other endeavors for that matter. Positive metrics can provide enhanced valuations of businesses, lead to improved salaries, articulate customer perceptions, they validate strategies and more. Poor metrics can decrease valuations, identify problem areas and get you fired in some cases if metrics don’t improve.

The Problems with some Metrics and Tools

I think we can all agree that performance metrics are indispensable tools in many business settings. Leaders and Managers should use those metrics to lead and manage the business. The analysis of business metrics can lull some leaders and managers into a state of complacency however. Examples of this can include the following:

• Metrics can mask poor performance - Profitability targets might be met through growing sales – yet growing expenses might not be as visible because profit levels are satisfactory. Leaders and managers who don’t dig into the numbers can be lulled to sleep thinking everything is going well, when there is an expense problem that needs to be addressed.
• Benchmarking against the average – Benchmarking is a great strategy used by enlightened management teams to drive performance improvement. Your organization may have common ground with other stores or groups on key performance measures and everyone feels good that they are not the outlier. But what if you are comparing your activities to average performers who are not performing well. What if everyone is average and nobody is exceptional? Average performance might provide a sense of relief or the feeling that the performance is good enough to get by. No flags are raised, no alarms are sounded….everyone is good. But what kind of performance are you leaving on the table if your expectations were raised and the bar was set higher?

➜ Read Now: How Benchmarking Can Reduce Costs When You Don’t Have Time to Quote

• Reports can mask the real story - Some performance metrics, tools and reports don’t go deep enough to provide the right business intelligence. Your P & L reports on approximately 22 or 25 lines of expenses. Yet those expense lines tend to aggregate nearly 150 different expenses incurred by the organization and hence do not provide the leadership team with the correct information to understand and manage their expenses. You look at the supply account and think of it as one bucket, but in fact you are probably buying supplies from multiple suppliers across seven(7) expense categories. One P & L expense line doesn’t give you the information you need to manage expense effectively.

How Leadership Can Make Profitability Improvements Stick

• Leadership Steps Up – if profitability isn’t where it is supposed to be, leadership needs to step up, bring the team together, develop a “serious” plan and then execute the plan. Increased profitability will come from selling or servicing more profitable deals and from managing the expense line more effectively. A two-pronged approach (revenue and expenses) is the strategic approach….the serious approach. Leaders need to lead….not observe others and report the result. General Patton didn’t say to his troops…….”I know you want to do a good job…..so go as far as you can”…….but rather he was very clear about the objective and he drove his army to meet and exceed the objective.
• Leadership Raises the Bar – if the ownership or leadership doesn’t insist on significantly better results, they probably won’t happen. Expectations need to change dramatically. When they do, “out of the box” thinking and approaches will occur. And if they don’t….leadership needs to insist on trying something new.
• Develop an Expense Attack Plan – You probably have a well-oiled machine attacking new revenues. But you probably do not have a strategic approach to your expense management. It might be time to appoint a single person in the organization to take responsibility for all expenses and attack them. From headcount, to bank fees, floor plan, semi-fixed…..you have at least 130 categories of expense categories that will yield real results if you take the time and have the patience to execute a well thought out plan. Get rid of the nice to haves….look for duplications that you can get rid of…..renegotiate with current suppliers by giving them a target…..lock supplier pricing to prevent increases……and more. Building a pend map is an invaluable tool for a management team that is serious about attacking and reducing expenses.

➜ Read Now: How to Create a Strategic Spend Map [Free Template]

• Lead from the front – Passive leadership, the collegial approach where everyone gets to do what they want results in so-so performance. Get out in front, create the vision, become the primary visionary cheerleader for this effort, then provide the resources and tools and manage for improved performance.

Final Thoughts

Leaders have an obligation to drive the business to targeted profitability. When that profitability is challenged, or results are slipping, there are really two alternatives…….increase revenues or reduce costs…….preferably both strategies will be employed.

Most organizations have a top notch team driving top line revenue. They use a multitude of programs and tools to assist their team drive top line and profitability.

On the other hand, Procurement research tells us that there is a 25% cost reduction opportunity out there if the right strategies are employed by organizations. Most organizations don’t address their expense management strategies in a serious way until problems with profitability occurs.

If profits are not reaching targeted levels, it is time for management to diagnose the data and performance metrics to find opportunities to enhance revenues and reduce expenses. Financial reports can sometimes mask problems and opportunities…..so it is important to involve your management team in the process of setting new stretch objectives and a new more aggressive plan to reduce costs. Building a spend map is a proven way to break down the spend for supplies and services(semi-fixed) and allow leadership an opportunity to build a plan, drive down costs and improve profitability.

Leadership needs to get engaged, pull the team together, set some stretch objectives and get the organization on track to achieve their targeted profit levels. The money is there……..leadership should be proactive and get involved now to preclude uncertainty and chaos later.

If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. StrategicSource’s Profit Improvement program help you identify areas for improvement long-term.