Recent crisis at Billabong and Dick Smith, Fantastic Furniture, PaperlinX, Hills Industries, Orica, Salmat, Woolworths, Slater and Gordon have all seen the CEO exited from the business with the exception of Slater & Gordon whose share price has fallen from a high of around $7.85 to $0.59cents representing a 92% loss in share value in less than 12 months.
All these companies have had in the past been successful. Their fall has as much to do with the culture and mindset within the business as changing and disrupted business models eroded their pricing power or final demand for their products or services.
As an insider working with a number of these companies over the years, there is one common denominator that I have experienced first-hand and that is the CEO and Board’s lack of focus on revenue, pricing and margin management.
All of these companies have had an attempt to fix margins through various methods – costs down, blanket price rises and 1000’s email discussions supported by 100s of PowerPoint pack describing the exact angle of the ship’s descent into the abyss.
In contrast, the CEOs who take an active interest in the nature of revenue, pricing and margin management have seen their businesses get focused on the right things at the right time and weather the storm to hold revenue and margins or,at least be only down on budget by smaller more recoverable percentages.
I like to look at precedent and use everyday observations to identify direction and a course of action that has the best probability of success. In studying companies like General Electric, Caterpillar, Dupont and Coca-Cola, we see many examples of pricing strategy and performance being elevated to the board room.
Jeff Immelt the CEO of GE, outlines in one of his first shareholder letters that “his morning begins with a review of working capital or pricing”. Think about that for one moment. This is the CEO who succeeded Jack Welch, making pricing a priority. That is a best practice benchmark.
So in light of the turmoil faced by ASX listed companies and my observations firsthand of what does not appear to work
I would like to provide a checklist of questions for the Board and CEO to walk through at their next meeting to identify risk, opportunities and develop the right strategy.
This checklist can be run as a daylong workshop or series of shorter workshops to allow time for evaluation and review.
Area of Focus & Key questions
Board and CEO working together
1. Have we given the CEO the support and focus to drive revenue, pricing and margin?
2. Do we as a Board give revenue, pricing and margin management adequate airtime at Board meetings?
3. As a board do we have enough commercial literacy in pricing to ask the right questions and give effective feedback?
• Performance and KPIs 4. Do we have the right margin metrics and KPIs to identify and diagnose potential sources of revenue and margin leakage?
5. What are the leading and lagging indicators or margin erosion in the business?
Vision, Strategy and Alignment
6. Does the CEO have the clarity and vision around the right revenue model pricing strategy to deliver on the EBIT targets required?
7. Do we have a published pricing strategy that is understood by all sales, marketing finance and operation staff?
8. Is our pricing strategy aligned to our value propositions that serve our ideal target markets?
9. Are the executive team aligned to the pricing strategy?
Policies and practices
10. What is the potential risk to revenues and margins?
11. How do we know if our list price, discounts and rebates are correctly structured to drive incremental gross margin earnings?
12. Do we have pricing policy in place that reflects our pricing strategy and is commercially practical?
13. Who provides the checks and oversights to rebate and discounts and what controls are in place?
14. Do we have a pricing and margin governance program in place?
15. Are the audits we are running really thorough or are we in fact having a lot of boxes ticked without the serious due diligence needed?
16. Have we provided out teams with the right training and education to manage pricing effectively?
17. What is the commercial literacy in the organisation?
18. Are our pricing systems effective in providing us with accurate readings on revenue, pricing and margin?
19. Can we undertake analytics to identify margin risks and opportunities?
Communication and Relationship Management
20. Do we communicate the pricing strategy and direction to the whole of the business?
21. Do we have a change management plan in place to help the salesforce transition from discounting to close the sale to more structured pricing tactics & programs aligned to the overall pricing strategy?
22. Do we have a plan to manage the loss of a major customer(s)?
23. Will our pricing strategy or policy change should we have to announce a profit downgrade?
24. Do we have a pricing mastermind in place to help get the business back on track?
This list will provide a starting point to carry out some fairly tough and robust discussions. If it is undertaken correctly there will be some controversy. There will be a debate. This is good. Competition and alternative viewpoints almost always generate better outcomes.
Here is one other little secret I have found over the years. People work well together when they all can feel connected to a bigger picture, a greater power of good or a higher purpose.
When that greater power of good or higher purpose is missing, company culture reverts to the cult of personality led management. Inevitably, this cult of personality is often based on fear and peer conformity and more often than not, a touch of arrogance. This the culture that pervaded Woolworths for many years.
Much has already been written about this elsewhere so I will only speak on what I personally witnessed and that was all of the above and at times criminality.
One specific example was a situation whereby the National Account Manager of a key grocery supplier to Woolworths was found to have provided Woolworths with an additional unauthorised $2.0M in promotional discounts to help his Woolworths buyer meet margin budgets.His buyer just happened to also be the Best Man at his wedding some years before.
This is a clear breach of the corporate code of conduct whereby the sales force entrusted to negotiate on behalf of the company cannot, and should not carry on deep personal friendships that will clearly create a conflict of interest or at best, clouded judgement.
The Managing Director of the FMCG supplier knew of this friendship but chose to overlook this liability. It eventually put his job and reputation at risk when the unauthorised discounting was discovered by a vigilant commercial pricing team. The case went before court and the offending account manager sentenced to 136 hours of community service.
In this case, the Board did not have in place an oversight and independent sign off process. The convicted account manager believed that they had the unfettered right to make pricing decisions on their own. This type of culture present a major risk to companies and should be a primary concern of the board to work with the CEO to eliminate a sense of entitlement to make pricing and commercial decisions without reference or deep oversight and sign-off.
Today as we speak, there are 1000s of Sales Directors and Account reps who can offer discounts, rebates and trading terms to market and then sign off these offers as payments to customers in cash or kind. This a clear breach of Sarbanes-Oxley separation of duties. It is something every board should check as soon as possible.
Often I receive stories like this one from colleagues. They need to be told.
We are living in an age where the need to be candid, serve a higher purpose and be connected to what is right has never been more important.
This isn’t a call to sit around singing Kumbaya, or trying David Brent style, to be disingenuously sincere. It is a call for Australian business leaders and management to take on telling the truth and make candour a mark of real leadership.
For the companies listed earlier, this is the one element missing from the management culture. This candour is crucial if the business is serious about managing revenue, pricing and margins.