Vendavo discussion papers / Pain points and how to solve them / No 3 Summer 2016

LOOK BEYOND A ‘COST OUT’ APPROACH TO DRIVE SIGNIFICANT GAINS IN PROFIT AND MARGIN

How profit and margin management can help you deliver value fast

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Look beyond a ‘cost out’ approach: How profit and margin management technology can help you deliver value fast.

lCost-cutting has for decades been the quickest way of delivering short-term value.

lThis strategy has a serious downside, compromising growth and future prospects.

lBig data and new technology now give organisations an alternative strategy for delivering value without cutting costs.

lTotal visibility, in real time, across all segments, allows organisations to optimise their profit and margin on every sale, every time.

If you’re a CFO with one eye always on the bottom line, chances are you think of cost cutting as one of the main strategies for delivering shareholder value fast when it’s needed most.

And why wouldn’t you? For decades, that’s been the standard approach recommended by business schools across the world. It’s become so accepted that most people don’t question it any more.

But they should.

Because cost-cutting to deliver short-term value has long-term negative consequences that far outweigh the benefits. It can damage your ability to innovate, break into new markets, stay agile and react to competitive pressure or market forces.

THE COST-CUTTING PARADIGM: HOW DID WE GET HERE?Let’s be absolutely clear about one thing: cost-optimisation is something every CFO should care about and is an everyday exercise that should aim to improve efficiency and eliminate waste. But cost-cutting as a going concern to drive shareholder value is a risk.

Cost-cutting is not a one-off magic bullet that can be used when results fall short of expectations, leaving analysts disappointed and shareholders unhappy. It’s not the first lever you should reach for when the market contracts and you need to make savings fast.

But for decades, it’s been the cure-all for poor figures and economic downturns.

And that’s hardly surprising. Before the age of big data, deep analytics and dynamic pricing models, there was no real choice for CFOs. They knew they could probably improve margin to achieve the same effect, but had little idea how.

And that’s still the case.

Our research shows that even today, nearly half of CFOs (47%) don’t know how to increase margin quickly. 80% report inconsistencies in margin definition across their organisation. And 43% of companies believe sales teams are using gut feel to make pricing decisions1.

With figures like that, it’s no wonder that many CFOs still reach for the lever of cost-cutting to deliver short-term value.

Cost-cutting is not a one-off magic bullet. But for decades, it’s been the cure-all for poor figures and economic downturns.

1. Vendavo and Cranfield School of Management research.

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Look beyond a ‘cost out’ approach: How profit and margin management technology can help you deliver value fast.

COST-CUTTING: THE WMD OF LONG-TERM GROWTHCFOs have traditionally looked at the cost of personnel, materials, operations, production and machinery and to see where immediate savings can be made.

The trouble is, these big ‘savings’ actually cost a lot more down the line.

For example, cutting marketing spend may look attractive because it gives you an immediate financial shot in the arm. But longer term, your decreased visibility in the market hits sales and your bottom line.

Cutting your R&D budget also looks like a ready-made solution to short-term financial difficulties. But it cripples your ability to innovate and compete with other players who are heavily investing in new products and services.

Cutting the workforce can deliver cost savings quickly, but the downside is significant. Savings can be realised through workforce redeployment and redundancy programs for long-serving employees, after all, they’re the ones with higher salaries and better pension schemes.

But they’re also the most experienced people in the organisation, so the corporate talent pool is seriously compromised, and knowledge transfer becomes more difficult. Long-term relationships with customers could be affected, and succession planning could be damaged.

Divesting part of your business generates cash fast, but it’s not always the best long term strategy. It may mean that you exit a sector of the market simply to generate funds, rather than because it makes sounds business sense. Re-entering later may prove much more expensive.

So clearly, cutting costs is not the answer. It may well have been the standard approach for a very long time, but over the last decade, there’s been a quiet revolution.

And it’s being driven by technology.

FROM CUTTING COST TO ADDING VALUE

The technological revolution has fundamentally changed how organisations manage pricing.

Sophisticated tools help them identify margin leakage in every area, ensuring that they’re getting the best price across all segments for all products.

Vendavo is at the forefront of this revolution, enabling companies to:

• Move beyond a cost-out approach, by finding and eliminating margin leakage and pricing inefficiencies to maximise profit on every deal. The gains realised will far outstrip any short-term savings made by traditional cost-cutting.

• Stay competitive and realise the best price, by aligning product, pricing, finance and sales teams. With the strategy in place, we’ll ensure buy-in across the organisation, so deals are closed confidently at consistently higher profit margins.

• Deploy a value-based pricing model, ensuring a fair price for every product, in every market. This comprehensive approach is based on detailed analytics and real-time data, not historical pricing or best guesses.

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Look beyond a ‘cost out’ approach: How profit and margin management technology can help you deliver value fast.

BIG DATA AND YOUR BOTTOM LINEGone are the days when CFOs had no visibility. Big data and analytics now show the actual performance of a company in ways that were previously unimaginable.

10 years ago, CFOs were working with reports that were often incomplete and quickly out of date. They couldn’t easily drill down to see discounts, freight charges, rebates or any of the factors that were eroding profit.

Today’s technology allows CFOs to get an absolute view of margin and profit performance. They can see how sales teams are closing deals, and whether they’re being closed at the acceptable threshold. They have an overview of business dynamics in real time that allows them to see in precise detail where margin is being lost.

With these incredibly powerful tools at their disposal, organisations can finally stop cutting costs for short-term gain. They can start adding value and maximising profit. And they can turn pricing from an imprecise art into exact science.

SEGMENTATION AND VALUE-BASED PRICINGSegmentation is fundamental to maximising profit. Some organisations have thousands of segments across products, markets and customers.

Many large B2B companies have engaged big-brand consulting companies to redefine and update a segmentation model over a period of several months. The problem is that this was a one-time snapshot of their business that quickly becomes out of date and negatively impacts margin performance.

Now it’s possible to gain visibility to your segment performance at the touch of a button. Data points, collected from all points of the business, are stored in a repository where proven complex algorithms are applied, to produce pricing

models that are of astonishing sophistication and precision. This detailed view is based on the purchasing behaviour of your customers, and can be dynamically refreshed. Organisations have instant access to financial performance analytics, allowing them to optimise price and margin per segment.

This advanced segmentation opens the way to value-based pricing. Different segments of the market will pay more or less for the same products, based on perceived value.

For example, if you’re a plastics manufacturer, you can charge a client more if the end product is a mobile phone rather than a disposable razor. The same product may also command a different price in different geographies. Advanced segmentation is key to knowing and understanding price tolerance in these situations, so you can maximise margin and profit.

In the past, CFOs knew that money was probably being left on the table somewhere along the sales cycle, but had no idea how to identify or quantify it. And with so many variables – products, markets, segments, discounting, legacy deals – the equation was just too complicated and multi-dimensional to understand.

So instead, they reached for something that was easy to understand: cost. And in the process, they ran the risk of causing long-term damage.

But now, in the era of big data, deep analytics and sophisticated pricing models, you no longer have to choose between short-term gain and long-term growth.

Vendavo will show you how to move beyond the cost-out approach once and for all, transforming your business – and your bottom line – forever.

IN THE ERA OF BIG DATA, DEEP ANALYTICS AND SOPHISTICATED PRICING MODELS, YOU NO LONGER HAVE TO CHOOSE BETWEEN SHORT-TERM GAIN AND LONG-TERM GROWTH.

GET IN TOUCH TODAYContact us today for a FREE, no-obligation consultationsales@vendavo.com