This article first appeared in the March, 2007 edition of the Jacksonville Business Journal
A number of years ago I was consulting with a large engineering company that realized it was making less money at the end of the year than it thought it should. When we analyzed the company's projects we discovered that the company was only half as profitable as projected. Even worse, no one actually knew where the money had gone! Yet this company was still one of the most profitable in its industry.
Over the next several years we analyzed the company to discover where most of the money had "leaked out" in the course of doing business. Through specific actions we were able to recover 70% of that lost 50%. The difference was so significant that it enabled the company to grow internationally. Today it is ten times the size it was ten years ago...and just as profitable.
Every company has "leakage" that causes the loss of potential profits between the top and bottom line. If we understand the most common causes of leakage we can implement the changes that can have a remarkable impact on profitability.
What's Leaking?
Every company has a business model. The elements of a business model typically include a vision and mission, a suite of products and services, a "go-to-market" strategy for identifying and winning customers, a service delivery model for providing products and services, a human resource model, and a financial model that determines a company's potential profitability.
Note the term "potential profitability." This represents the amount of money a company can potentially earn for providing its goods and services. But few companies achieve their full profitability potential. That potential would only be attained if everything was performed perfectly. And that is rarely the case. The difference between potential profitability and the actual profitability attained is what we call "leakage."
Leakage is known by many other names. Some of the most common include: waste, inefficiencies, redundancies, errors, unacceptable quality, rework, checking, excessive reporting, customer dissatisfaction, excess inventory, rejects, and lost sales.
What are the factors that cause leakage? Consider the following partial list. Work that has to be re-done; incorrect initial information; human error; time spent checking the work of others; time spent creating unnecessary reports; time spent with underperforming employees; time spent resolving customer conflicts; work products rejected due to quality errors; incorrect invoices.
The hard truth is that every dollar lost through leakage is a profit dollar; not a revenue dollar. The replacement of money lost through leakage requires a significant multiple of the loss - the additional revenue required to replace those lost profit dollars.
The Solution
The solution is a comprehensive system designed to reduce leakage; to eliminate anything that detracts from bottom line profitability. Some aspects of leakage are visible and obvious. Unfortunately, most are much harder to see and simply accepted as "part of the cost of doing business." But many of these costs can be reduced and even eliminated.
When all the business elements are integrated the result is the continuous and relentless elimination of leakage through improved quality and efficiency. Here are the major categories of the solution.
Strategic Direction - The company vision and core strategies must be set by senior management. This includes an operating business plan, a long term capital investment plan, a market positioning strategy, and a culture of accountability, personal responsibility and high performance.
Process Improvement - Creation of a master blueprint of the core work processes to guide and prioritize continuous improvement initiatives, and implementation of teams both for cross-functional processes and departmental work processes.
Measurement System - A small number of high level strategic measures managed by senior management and a defined set of key performance indicators for all operational areas.
Customer Satisfaction - A formal system for tracking and addressing customer issues, plus a customer satisfaction survey designed to provide "actionable feedback" for company operations.
Human Resource Development - A goal setting system, performance-based rewards and recognition, comprehensive training, and pay for performance.
Monitoring and Control System - To ensure that quality improvements are achieving their desired results.
Implementing and sustaining a system for continuous improvement that is "owned" by all employees can reduce a company's leakage significantly and dramatically increase its performance and its profitability.
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