Five Roadblocks to Increased Profitability

by Robert Steinberg and Erik Dove

Following a prolonged recession, business owners are now looking to increase profitability for a number of different reasons, including selling shortly, refinancing, increasing dividends and salaries or obtaining additional capital. The cost-cutting solutions to increased profitability have probably been implemented. However, for many companies, there is still a fast path to improved profitability through identifying key roadblocks. These roadblocks can be summed up in five words: Owners, managers and employees don’t know, see, hear, trust or care.

Change 1:  Setting Up the Systems to Know
On a weekly or even a monthly basis, do you know where your company is and what got you there? We can state categorically in every troubled company the answer is invariably “NO.” The managers cannot tell you in real time what is happening in the business or why it is happening.

The key to “knowing” is improving how you handle the information already in your system — information on cash flow, revenue by customer or product, margin by product or revenue stream and A/R, A/P and inventory levels. The critical information in your system just needs to be filtered to company decision-makers so time and energy is focused on correcting problems as they arise.

Change 2: Seeing Where You Want To Go and Finding Out How To Get There
“Seeing” where you want to go requires more effort but is equally as important. Business owners hear about vision and mission statements, and they immediately think of consultant speak and pointless gibberish. We agree that much time spent on these matters is pointless and worthless.  However, the question of “why” you do what you do in business really is as important as “what” you do or “how” you do it. If we ask a business owner the “why” question or the key purpose of their business and he or she doesn’t have an answer, we immediately know that business will not prosper in the long-term.

At Apple, Steve Jobs was a man who understood his company’s purpose — that purpose was grandiose — to change how mankind functions through technological innovation. He recruited the head of Pepsi by asking one simple question: “Do you want to sell sugar water or change the world?” With that purpose, he was able to fulfill his recruiting objectives. You don’t need a purpose that large; however, a clearly articulated purpose can have a huge impact on the success of your business.

Change 3: Start Hearing What Your Customers, Vendors, Lenders and Employees Have To Say
The “hearing” roadblock is another that sounds simple, but it trips up many businesses and their leadership. As management consultants, we are often told “you can’t help us because you don’t know our business or business sector.” It is true that the owners and managers should know their business and industry much better than an outsider. However, as outsiders, we have a huge advantage over them: We are willing to listen. By listening, the playbook on how to immediately enhance profitability can be told to you by your customers, vendors, lenders and employees. You just have to take the time and be willing to listen.

Why is it so hard for “insiders” to listen?  The reason is simple: It is human nature to seek to justify and defend what you have done and what you are doing. If you start listening, really listening, that narrative could and likely would be turned on its head. One of our main tasks is to listen to all of the stakeholders and help the owner or manager listen. Your customers, vendors, lender, and employees have innovative answers that can take your company to a whole new level.

Change 4: Develop An Atmosphere of Mutual Trust
Mining the knowledge within a company requires more than just listening. Just because management claims to be listening doesn’t mean the employees trust they can speak the truth. To find the answers, management must create a culture of openness and receptivity to ideas and change. Employees must trust that they aren’t going to be ridiculed, demoted or even terminated for letting the company know what a customer or vendor is saying, what process isn’t working or that they could be more productive if they did this instead of that.

Change 5: Find Out If Your Employees Care About Your Objectives
Not having a purpose and not listening or trusting key constituencies — another highly insidious characteristic of flat-lined or worse companies — is that there is “fracture” or “nonalignment.”  Again, these words sound like consultant speak, but their impact is not theoretical, as it can be devastating to a business. While owners may think their managers are aligned with their interest to grow fast (particularly when they are bonused for achieving growth targets), they are likely to be more concerned about preserving their jobs and those of their friends or not causing the discomfort, adversity and dislocation that result from change associated with fast growth.

Managing Change
Profit improvement can be managed and can be critical, not only to the owners, but to other constituencies of the company as well. Once the owner and CEO decide to make a concerted effort to focus on increasing profits, the place to start is not on time studies on the manufacturing line, changes in financial systems or other such processes. We believe that, too often, companies and/or consultants start at the micro level of process improvement and miss the big picture issues of identifying and removing the key impediments to profitability.

In short, they get caught up in the trees without first evaluating the forest. In our view, by first identifying the big picture problems and developing a simple and quantifiable plan focused on the removing the key roadblocks to profitability, a business can most quickly increase its earnings and create sustainable, long-term value.

Rob Steinberg is the co-founder and Managing Partner of Cornerstone Advisory Services, a management consulting, interim management and outsourced Operating Partner firm in the Twin Cities Minnesota. He was a Managing Director at CRG (now CRG Deloitte) and worked at a split-off firm from the West Coast Office of Alvarez and Marsal. He has served in 6 C-Level positions, including as CEO of several companies, and has provided consulting services for tech, manufacturing, construction and retail businesses.