Cranfield School of Management
In the last month we have seen the profit margins of many house-hold names and big market players tumble as some struggle amidst political and economic uncertainty, as well as fluctuating commodity prices. And while we can’t place the blame solely on Brexit, it has certainly played its part in exacerbating market volatility.
In such an uncertain environment, organisations are under immense pressure to scrutinise and secure acceptable margins and eke out extra profit where they can to stay at the top of their game. While the starting point for most large companies will be to prioritise cost optimisation or simply cut costs, understanding how to regain control of margins should rather be a top priority for businesses.
It is common for CFOs and other financial leaders to be brought up on a “cost optimisation mind-set” throughout their career; remember, austerity started back in 2008 and 2009, but although this is ongoing and an important focal point, cost-out as a strategy just isn’t sustainable in in the long-term.
To make real change, leaders must rather overcome barriers to data, communication and collaboration, and create a company culture which is focused on raising profits. Organisations which give margin the attention it deserves, readily invest into the tools and resources required to analyse financial performance and act on the findings, will be best positioned to outperform competition.
This was a key finding in an in-depth study I undertook in collaboration with Vendavo. This included survey data from 200 CFOs and CMOs across Europe of companies with more than $1 billion revenues, to explore the management of margin across a range of enterprises in different industries.
We found some compelling insights that suggested those companies without the “margin mind-set” or the tools lagged behind their competitors, while leading companies, which positioned margin management ahead of cost optimisation exceeded market expectations.
So how do they do it?
Managing margins goes beyond the C-suite
Clearly, the C-suite need to have their eyes on the margin. However, for margin management to be truly successful, all employees must share the same understanding of margin across the enterprise, the organisations’ margin ambitions and common margin goals.
It might sound obvious, yet our research found that in many cases this just isn’t happening. In fact, we found instances where over 20 different definitions of margin exist across the organisation. This highlights just how important it is to instil the same values and culture throughout the company, if leaders are to make an impactful change on their margins and financial performance.
Further underlining how the wider organisation is not focused on margin, we found that many sales teams continue to price deals based on gut feeling (43%) or on the relationship with the customer (67%). This is broadly accepted by many, yet, a lot of business leaders also do not know how to influence change in the sales field and capture lost margin.
The solution isn’t to wrap the sales process in red-tape though; it’s much more about explaining and communicating why margin is meaningful across the company, extending the right data at the right time to instil confidence in the sales field that a great margin opportunity exists. It is also about empowering employees with the right tools to help them rely on their intuition with even greater success. We found that organisations performing ahead of market expectations equip their sales teams with real-time data to help close deals at much better prices. Those without shared understanding or real-time data lag behind.
True to type, we also found that CFOs, in particular those who are more experienced, are more acutely aware of rigid internal structures, which appear to impede their access to data and how they use it. Compared to other internal challenges, this was their biggest pain point when it came to managing margin, further emphasising the need for better communication and tools operating across traditional company silos.
Building a strategic profit margin plan
While many of the CFOs and CMOs we questioned realised they needed greater margin collaboration (61%), better insight (59%) and stronger teams (55%) to better their strategies, when asked if they knew how they’d increase margin tomorrow, more than a third (38%) said they would not know where to start.
From our research, it’s clear that leaders need to devote more time and resources into developing a long-term, strategic plan for managing and improving margins. They also need to get their employees on board, equipped with the right tools to make the best pricing deals, and execute the margin strategy with a coordinated approach reflective of a “margin mind-set”.
The Eight Actions Model for healthier margins
To be a success, the long-term plan needs to be centred around practical steps which will help organisations to regain control of margins. This eight actions model will guide leaders in managing margins to boost shareholder value and the financial health of their business:
- Increase awareness of growth drivers
Raising margins drives growth. Leaders must create certainty about what drives their growth by gathering data to challenge assumptions.
- Focus on margin
Successful leaders set priorities; they focus on maintaining or increasing margin. More time and resources must therefore be devoted to managing margins, otherwise lower levels in the organisation may try but fail in helping the company focus on success.
- Create a common ground
Companies handle, on average, half a dozen different definitions of what margin means. Leaders must capture the state of confusion about margin in their boardroom and company, visualise it to motivate discussions and develop a shared understanding to finally make margin meaningful.
- Analyse how to increase margin
Many executives at companies that lag behind market expectations do not know how to increase margin. Don’t be one of them. Acquire strategic capabilities. Increase how margin aware employees are. Systematically seize the opportunities that big data presents. Address additional data needs. Identify the key levers to manage margins more effectively.
- Open the data vault
Provide accurate data and insight through systems and reports for larger numbers of employees. Remove data bottlenecks quickly. Identify which employees, aligned to the levers identified above, currently have the strongest need for access to data. Provide them the insight they need to broaden margins.
- Offer data that matters
Using a large volume of data can be good, however data quality and data relevance are paramount. The happiness of employees with big data, data analytics and margin management programmes depends on the quality of the data. Ensure that employees receive the data quality they need to make better decisions in real-time.
- Help client facing employees exert better judgment
It is essential to bring information and intuition together. Enhance employees’ hard and soft skills; help them to rely on their intuition with even greater success.
- Ensure that awareness, analysis and action are linked
The ‘triple A’ of awareness, analysis and action need to inform each other. Create positive dynamics for better judgment in the crucial moments when customers make decisions about their company’s margin.
The eight actions require imagination and commitment. Margin leakage is common across all organisations and poses a real risk for some. If a company is to take control of its margin, its leaders need to reconcile contradictions internally and overcome barriers to data, communication and collaboration. Empowering people across the company with tools that are fit-for-purpose and that enable to access data in real-time enhances relationships with clients by providing more value at higher margins.
It is not a fantasy to align people to accurately measure and report profit and margin up-to-the-minute. Companies that are already investing in such real-time solutions are outperforming their competitors with healthy margins and sustaining leading positions in their chosen markets. Ambitious CFOs and CMOs with their minds set to raising profits are in pole position to significantly shape margin performance and increase shareholder value.