CHALLENGE –
Post-merger, the now 20-year-old international company was in need of a re-envisioning of expectations within the Finance Team as well as a structured, yet practical way to measure the Sales Team’s contribution to the organization. The company was facing the challenge of integration with a lack of urgency, structure, and focus from both departments. The company lacked financial discipline as well as excessive selling expenses. Setting commissions aside, to run a profitable sales/service organization, you must have complete control of not only your costs, but also which costs should be appropriately recognized (within the P&L), and attributed to, the actual transaction. Without doing so, profitability will suffer greatly.
ACTIONS –
From a change management perspective, we wanted to mitigate risk of execution by too much change. With that in mind, we incorporated changes within the existing structure which consisted of six regions across North America, with a Regional President leading a team of salespeople.
There were two basic concepts that needed to be implemented. First, the new focus of all Regional Presidents would be on Contribution Margin (defined as Gross Profit minus all Variable Costs associated with the client relationship). Second, any/all expenses tied directly to a client relationship would be considered a “Selling Expense”. We moved from a discussion of “SG&A” to Selling Expenses and General & Administrative Expenses. For example: credit card fees, technology costs, creative services and warehouse expenses associated with a particular client would now be captured, recorded, and assigned to the client vs. a “corporate expense.” In addition to some basic changes to record keeping, the Finance Team was now expected to have their monthly closing process completed by no later than the 15th of each month so the impact of measuring results would allow management to proactively run the business.
This new focus for the Regional Presidents was to 1) educate their sales teams on the new structure and 2) to get them to embrace the fact that certain variable costs associated with specific orders and/or clients would now be accounted for differently. To demonstrate the level of importance to this change, each Regional President was required to present their budget to the Board of Directors prior to receiving approval of their annual budgets. Once the budget was approved – the Regional President was now accountable for a Plan (a “bogey”). However, the incentive to achieve Plan was potentially lucrative. If they exceeded their “bogey” and maintained a minimum Contribution Margin percentage (divided by the revenue within their region) they would receive 25% of the excess as their annual bonus. Hence – holding Sr. leadership accountable through their compensation.
RESULTS –
Improved Pre-Tax Income by >$2MM in one year! The company also realized some unexpected top line growth due to Sales Associates changing their behavior…. How you ask? They started charging for what previously they had given away for free!