Situation: A company has multiple locations from which it both sells products and provides services. One location has been in place for several years and produces good revenue but consistently fails to be profitable. The CEO has met with the managers in charge of this location and has set broad objectives to demonstrate a trend toward profitability. However, she is concerned that these objectives won’t be met. How do you manage for profitability?
Advice from the CEOs:
- To be effective objectives must be specific, measurable, and timebound. In addition, there must be clear consequences for failing to meet objectives.
- If a business is not covering its own costs, there are three alternatives: increase prices, reduce costs, or both.
- Calculate the revenue impact of a 1% cross-the-board price increase at the location or across the company. Is this enough to cover the loss? What about a 2% increase? What is required to produce profitability?
- Historically, have the location managers been responsible for business results? If not, does it make sense to continue with these managers and to expect different behavior or results?
- While the managers may be well-intentioned, do they possess the necessary business skills? Would training or education assist?
- Once objectives are set and incentives are changed to make the managers’ pay dependent on profitability, the CEO may be surprised at their ability to comprehend and tackle the situation – with the CEO’s oversight.
- How do you change pay and incentives without sending a negative message?
- A person who is paid hourly has the incentive to maximize hours worked, not productivity during hours worked. If the manager is shifted to salary at the same level he receives now or lower, with the potential to more than make up the difference through regular incentive bonuses, it becomes easier to direct him to make efficient use of his time.
- How do you change the roles and focus of the managers?
- The customer development manager is the only one who can impact revenue – by bringing in more business. Bonuses are based on both new business acquired and total revenue received.
- The operations manager cannot contribute to revenue within his current responsibilities but can look for places where the cost of operations can be reduced. Bonuses are based on cost savings achieved.