We recently held our quarterly huddle for our CEOs and covered a topic that has come up in the CEO Collective peer groups: Finding profitability pockets that can have an impact on the bottom line.
Gordie Spater, Katahdin Group CEO, started the huddle off by sharing that while we’ve all enjoyed a boom with much growth and profits, inflation crept up and the supply chain got tighter, making profitability more challenging.
Gordie identified some common levers to start the discussion:
#1 Pricing is your best lever.
Pricing was a big topic in the discussion. And while other topics were covered, the group came back to pricing throughout. Most CEOs had increased prices and a few others were looking for alternative ways to get to their margin goals. There were several strong voices advocating for price as the best way to profitability.
A CEO with experience in different industries, emphasized that pricing discipline and strategy is an under-pulled level. He made the point that companies can gravitate towards cost control, which is important, but that the impact of 1% price realization and price leakage has a bigger impact on the bottom line. He also regularly invests in pricing science and analytics in order to have the ability to segment and drill down.
Supporting this point, another CEO who does a lot of buying, shared that currently businesses are increasing prices because the market has less sensitivity to the increase. His company buys large infrastructure pieces and costs are going up 30-40% continuously. His belief is that companies will continue to take advantage of this opportunity until they are afraid to do so. He encouraged other CEOs in the group who might be afraid that raising prices could have a detrimental effect on the business, to consider this is probably not the case and to test increases.
#2 Data is key in understanding the opportunities. Do the hard work to get the visibility.
This was a recurring theme throughout the discussion. Multiple CEOs made reference to the work they’d done to have access to data that allows them to drill down and look at profitability from multiple angles.
For example, a CEO of a business services firm shared that his team brought all their financial and operational data into a data warehouse and then built dashboards to look at 1) team profitability, 2) service line profitability, and 3) customer profitability. With this approach, they were able to drill into the sub service and the people doing that work to see the opportunities for profit.
A CEO who runs a larger distribution company shared that her team had also been doing the hard work to have better visibility. With that data they are now better able to assess the profitability of the items they sell, and especially can drill down into the slower selling items. This is allowing their supply chain analyst and buyers to make better decisions about what they’re buying, so they are getting the inventory that best supports profitability.
#3 Be ready to make operational changes based on what you learn from data.
Once you have access to the data and do the analysis, there may be operational changes needed. In the case of the services CEO, his team aggregated the data into a place that it was accessible so that people on the front lines could better determine how to drive profitability. Then they created comp plans in a way where that motivated those team members to do the things that would have the biggest impact on the bottom line.
Because his greatest cost is people, this CEO needed to determine how to get the most revenue out of each individual. They split people into practice teams and tied the compensation of the leads of those teams to the gross margin of the work they are executing. In doing so, they found significant improvement not only in visibility by in financial outcomes.
#4 Have a clear process in place to manage the “cost” side of the business (not just the “pricing” side).
The same CEO who advocated strongly for pricing strategy, also emphasized the importance of having a granular understanding of the elements of cost and how they evolve. Every year, setting targets for driving utilization, absorption, material content, and material price evolution.
#5 Be creative. Be open to new ideas and opportunities.
Creativity is always a must when looking for profitability pockets. Several of the CEOs shared that they were actively doing cost savings exercises and, in addition, were looking for other creative ways to increase margins. Here are a few that were shared:
In closing, for the CEOs reading this: High levels of inflation as well as logistical and labor issues are driving increased pressure on gross margins and profitability. If you aren’t already doing it, now is the time to look at ways to offset that pressure and identify the “profitability pockets” that will help you keep your business performance moving forward.
ABOUT THE CEO HUDDLE: Our quarterly CEO Huddles are member-only events for those in The Katahdin Group’s CEO Collective peer network. This is a forum for discussion and peer feedback on topics that are timely and important for those in the CEO seat.