CASE STUDY 14/12
Can a Strategic Finance Office add
10% to your bottom-line
by rethinking your business verticals?
The Challenge
The company had 5 lines of business (LoBs) which it had classified as independent functions that only depended on centrally for management time, governance, and support functions. The business & sales teams were separately allotted to each LoB as it required domain expertise to make a sale. The marketing team was a shared function whose time was allocated across all the LoBs based on the revenue generated by each LoB.
Despite achieving over 20% CAGR over the last 5 years, the accrual of cash was reducing. The company continued to maintain profitability above its industry peers and hence were unaware that there could be an issue. During the same 5 year period, the company had also not made any sizable infrastructure spends.
Something was amiss. Enter Prequate.
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance. Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved. This meant that the problem was less tactical and more strategic.
Knowing the why
The power of looking at a business outside-in is something that businesses tend to forget to do after a period. As the management gets busier in day-to-day operations, they forget to re-evaluate periodically what they are doing right and what they are doing wrong. Further, what worked in the past may not be what is working at this point in time for them. The value of the SFO, which functions as an external problem-solving crack team comes in here.
"
Because something worked well in the past does not mean it will work well today. Every few years, a company needs to look inward at everything they're doing and evaluate 'why'. Here, an external team can be the difference between knowing and actually doing something about it.
"
Pradyumna Nag, Partner
The Engagement
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance.
Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved.
This meant that the problem was less tactical and more strategic.
The Approach
The first step to solving a problem is understanding how the business was making money mathematically.
Step 1
Introduce a more structured method at capturing costs relating to business operations of each LoB (right from the marketing team to post-sale support) + standardize reporting languages across all the LoBs
Step 2
Execute a detailed LoB study of all the LoBs with an eye for moving from allocations (distributed by share) to the allotment (identified for a specific purpose)
Step 3
Identify under-performing/ unprofitable/ onerous LoBs and deep-dive to understand the reasons for their impact on overall profitability
It was observed that one of their core LoBs on which over 20% of their workforce was allotted, was leaking over $50k a month of leakages while being managed by one of their most talented executives, who was constantly trying to improve efficiencies. The Executive was effectively running the most efficient sinking ship. Further, the referral value and cross-sell opportunities estimated was less than 12% on over 80% of their accounts.
Once the leaky tap is identified, you don't go with a sledgehammer to fix it. Neither do you run to switch off the water for the whole building? Transformation is also like that.
Careful analysis, followed by a clearly orchestrated action plan.
Followed by action.
CASE STUDY 15/05
Can a Strategic Finance Office add
6% to your bottom-line
by rethinking how you cost
& price your products?
Download this case study as a PDF >
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About the client
Silver*, Private Limited ( 'Silver' ), was a 20-year-old manufacturing company. Silver operated with a product line that had carved a niche for itself in its line. Catering to a niche requirement, they faced little to no competition on the top 80% of their product lines. Over time, it had been able to maintain a competitive edge and also maintain an edge over the competition in the products it manufactured.
Over the last 4 years, they had been ensuring consistent growth year on year with the addition of new product lines and improving product quality. They maintained a lean Finance Team of 5 members with a strong Head - Finance who had been with Silver for over 10 years.
Industry: Manufacturing
Location: India
Size: 100+ employees
Disclaimer: Considering the nature of work, client names & organizational specifics have been changed to protect client confidentiality.
The Challenge
Operationally, while their revenues had been consistently growing, their pricing needed to be competitive to keep their market share slowly growing. Their cost of production in the meanwhile continued to grow.
Measures to reduce the cost of production only had produced marginal improvements and often invalidated by the effort of making changes. The finance team, working mostly as an independent function, were unable to produce insights and define a long-term solution.
Any intervention needed to be a mix of strategic & operational finance.
Enter Prequate.
Knowing the why
A business in a niche segment with a competitive advantage must enjoy exceptional profitability. If a business is unable to achieve that, the company needs to question itself on 2 aspects - it's pricing and the related costing.
In an industry where customization is an important part of the solution, the need for making fundamentally strong decisions is quite critical involving a subtle balance between all the functions.
Silver had a challenge which was unique. Growing top-line. Growing bottom-line. Stagnant PAT margins?
Without a large outlier event (say a new production facility or unprecedented investment in R&D initiatives), there should have been improvements in the absolutes.
"
Identifying that there is a problem to fix is the first big challenge for most manufacturing companies. The second step is to find answers.
Interestingly, the answer to most problems is within the business itself and is driven by data.
Fixing those problems requires thinking like an entrepreneur than just a line manager. Silver's case is a classic case of how tying up small things can have big impacts when they operate together with cascading effects.
"
Rakesh Bordia, Partner
The Engagement
Prequate was brought in with a view to improving the quality of management reporting. In 3 months of doing an external review of the profitability and benchmarking to competition, it was observed that the company was able to make consistent profits but unable to grow profitability.
Further, the finance function ran as a completely independent and highly people dependent setup. Prequate was entrusted with overhauling the finance function to make it more proactive and help bounce back to higher profitability.
The Approach
The first step to solving these problems is to define the system of measurement and terms of information capture & analysis.
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Costing of products were being done on benchmarks set up more than 5 years back
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Ad-hoc/ custom requests were being costed on incremental than by drawing up real time data
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Annual cost escalations were being attributed to component brackets and not specific products based on material consumption
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Rules of thumb were the basis for the foundation of the mechanisms (making it extremely subjective and people dependent)
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SKU profitability had never been performed
With all these factors occurred in unison, Silver was able to finally realize that SKUs were not being measured in the right manner. There was a high likelihood that the sales team's energy was being dragged on to SKUs that weren't making money because of production surpluses. Custom requests may have been costing them dearly when they actually should have been adding to profitability.
Not every sale was a good sale.
Our approach was to first understand what was causing the problem and challenge the fundamentals.
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Is there a system in place or is practice being defined as a system?
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Is the system trained to capture all costs?
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Is this system able to explain the reason for stagnant profitability?
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Is there adequate information flow for studying profitability at an SKU level?
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On sub-contracting, are costs being allocated in the right manner?
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Is there a cost of customization defined?
An overhaul was needed.
The Prequate Difference
Step 1 / Detailed production study
to translate the entire production process of each SKU with reference to its line with real-time linking to capacity utilization of the line.
Step 2 / Detailed operations study
to translate all other non-revenue generating activities to the extent possible.
Step 3 / Creation of new data warehouse
to capture all real-time cost information directly from the accounting team and production line information from the factory floor using simple Excel, VBA & RDBMS.
Step 4 / Creation of real-time Costing Tool - XCoster
(a Prequate tool) which fetches real-time information from systems, including all material, line and operational costs, including lead times and line utilisations.
Step 5 / Creation of real-time Pricing Tool - XPricer
with inbuilt benchmarks of price sensitivity of product variant, competitive positioning, customization efforts, receivable recovery time and reorder levels of a component.
Step 6 / Revising all SOWs & Outgoing Job-work orders
to factor in elements of XPrice & XCost as compulsory attachments in all documents right from RFP to Invoicing.
Step 7 / Introduction of a completely overhauled reporting system & performance benchmarks with accountability
at each production level of I/O ratios, wastage, and consumption of material - at a floor level, process level, and function level.
IMPACT
Business Roadmap Advisory
Strategic Finance Office
Investment Banking
Sell-side
Investment Banking
Buy-side
Mergers & Acquisition
Advisory
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