Breaking It Down In Order to Build a Business

Posted on 05. Apr, 2011 in Kirchner Blog

I remember a turnaround challenge many years ago where the Company was perplexed by the fact that profitability was declining despite steady growth in sales. In fact, it seemed that sales and EBITDA were inversely related, that is, profitability seemed to decline in direct proportion to the growth in sales.

To get to the bottom of this, it required examining closely the way in which sales were conducted, and, just as importantly, how the product was delivered. This was a software company whose solution served a specific vertical. It was sold to businesses to displace existing software on the promise of a more modern architecture that would reduce internal support costs and therefore lower the total cost of ownership. There was demand for the product, but only if it were able to match the features and functionality of the incumbent systems.

Sales was doing a very good job of landing deals on the key selling features described above, but they were also, in an effort to grow the top line, and by extension, the bottom line, selling to whatever clients they could land. The company, it turns out, was insensitive to the variation in feature requirements among the dozen-or-so sub-verticals within its target vertical. The net result? High customization efforts (compounded by poor scoping, feature creep and project management) on every single sale meant that each one actually lost money. And the bigger the deal, the bigger the loss.

Having laid that bare, the solution was to select the sub-vertical whose requirements most closely matched the software’s capabilities and to focus Sales on that sub-vertical at the expense of all others.

But that solution was only visible once the market, sales activity and solution delivery were broken down and understood, rather than viewed superficially and in their ideal state.

Lew Turnquist