It’s Time to Fire Some of Your Customers


It’s Time to Fire Some of Your Customers – Anthony Tjan – Harvard Business Review.

Challenging times call for challenging decisions. What could be a more challenging decision than firing some customers/clients! There is a saying “In the absence of information, rumor and speculation will fill the void.” It is in this truth that lies the obstacle to making a good decision. Decision makers do not always have the data to know from where the profits emerge amongst their customer/client list, segment or even business units.

Regardless of the size of the business or business unit, there remains a lack of data identifying which customers/clients or segments are generating profits and which ones are soaking up resources. Without this data decision makers would need to rely on heuristics or some simple analytics such as the 80/20 Principle. And who could blame them for not wanting to fire customers using either of those techniques?

There are situations where a customer/client is in the 20% that generates 80% of the revenue and the company may be losing money serving them (or the relationship is less profitable than it should be). Each dollar of revenue must pass through the entire income statement. From that dollar take out the cost of goods/services sold (Costs of Doing Business) generating that specific dollar of revenue. After this subtraction remains the Gross Margin. The challenging part comes next, how to allocate the fixed/SG&A/overhead expenses (Costs of Being in Business). If this is done at all it is usually defined around some proportional relationship to revenues, a key driver such as machine hours. Either of those are superior to ‘not done at all.’ Yet they remain short of clearly identifying the level of profitability of customers/clients or segments. The client may on the basis of gross margin be profitable, yet by not measuring time consumed throughout the value chain the decision makers are missing the opportunity to make a better decision. And that decision may be to not fire the customer/client yet may be to renegotiate terms suitable to all involved.

A Wall Street firm was looking at their branches across the country and asking themselves this same question “Is it time to fire some branches (meaning to sell them)?” Without a process or methodology to allocate the firm’s overhead to those branches based on how much home office resources (time) was spent serving those branches they used another key driver Advisor Productivity. The result, 55 small branches where Productivity was lower than the firm average. Using their key driver, Advisor Productivity, to allocate home office expenses resulted in larger branches looking more profitable than they really are. The large branches with very high productivity are mostly in the Northeast, and due to the proximity they consume inordinately more of the home office resources. Unfortunately without better data the footprint was reduced and branches that consumed relatively small amounts of home office resources (read more profitable) were sold.

Is there a way to more accurately record the resources consumed through the entire value chain on a product, customer/client, segment basis? Yes. Using the practices outlined in Time Driven Activity Based Costing by Kaplan and Anderson a company or business unit can learn to measure the cost and profitability. With this data, decision makers will be able to make better decisions. This approach will work for service providers and manufacturers.

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About Consulting With Results
Experienced Consultant focused on delivering results across various industries, and throughout the value chain.

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