Interpersonal Business

Vol. LX

Dear Manager,

What determines which of these “hard assets” should be considered obsolete? It comes with the conclusion that what was previously an asset no longer sustains its value. There are clear and obvious fixed costs in retaining resources that no longer represent future revenue. Warehousing, financial carrying costs, data entry, and poor use of valuable management time in their maintenance, are just a few. The closer we look, the more apparent it becomes. When an asset is no longer an asset, it is time to cut our losses and move on. When was the last time you took an inventory of all your assets?

In this instance, I am no longer referring to the hard assets in your warehouses. What is the current financial inventory of those assets your business considers to be its good will, or “soft assets?” These include current manufacturers relationships, customers, sales territories, and staff positions within your organization. Certainly there is a constant ebb and flow in each of their evaluations. While the need to take a close look at the value of ones physical inventory may be obvious, it can be much less obvious to do the same for other organizational assets. Rarely have I seen an organization define a specific and detailed financial evaluation for this equation and each of its parts.

Begin by taking a full accounting of exactly where your revenue is generated in all aspects of your business. We often have a very general idea, yet it’s not uncommon to be well off the mark. We all know the rule of thumb that twenty percent of our assets sustain eighty percent of our revenue. I have always found this concept to be much closer to actuality than I ever anticipated.

If this is the foundation, then the bottom twenty to forty percent of your assets represent less than ten percent of your revenue. If this were true, would it not be considered obsolete inventory if professionally reviewed in any other light, or by any other form of measurement? Similar to an inventory of ones hard assets, what is the true cost of retaining underperforming and value-deprived soft assets?

For many years, I made a concerted effort to minimize the number of client manufacturers our organization represented. Our top five manufacturers represented seventy percent of our sales, with the remaining ten to twelve representing the remaining thirty percent. To take it one step further, the bottom five manufacturers represented less than five percent of our total revenue. As often as I would analyze this, adjusting the mix with the addition and subtraction of manufacturers, the bottom five manufacturers would continue to maintain a very similar percentage.

There were always other considerations in retaining some manufacturers, regardless of their current revenue. A manufacturer’s future growth potential, their significance to other areas of our presentation, or simply a foot in the door of a potentially lucrative category, all came into play. These “other considerations” should also be evaluated as part of your total inventory. I believe you will find that in all but the most rare circumstances, their net value is a few hairs above meaningless, while their carrying costs continue to be very significant. (By the way, ones ego can’t be concluded as an aspect of “other considerations.”)

My own rule of thumb always came down to the following: If, as an organization, we could double or triple the sales of one of these underperforming product categories, would they then represent any value? In almost all cases the answer was no, and the chances of actually increasing their sales by this multiple were slim to none.

We once represented a manufacturer who produced a variety of products from varied artists. They were convinced that one of their artists was being “under represented” by their national sales force. The truth was that this artist represented only one percent of their national sales, yet we were asked, and expected, to promote these products to new markets outside our current customer base. When I asked this manufacturer what percentage of their total sales this artist should represent, the response was an unequivocal, “You could double the volume!” I could hardly wait to redirect the field sales force for this dramatic potential!?!

I asked this manufacturer if they had considered the corresponding impact of this focus on the much more successful ninety-nine percent of their presentation. “If sales forces across the nation were directed to double the sales in this ultra limited category of the product mix, could your company accept reduced sales in other areas, especially your best sellers?” In fact, this was not an unusual conversation over the years.

There seems to be a tendency for all of us to minimize our risk by telling ourselves we are better protected and more secure by investing valuable resources in areas with little or no potential relating to investment. Meanwhile, time, energy and, at some level, our reputation, are being squandered on what should be considered “obsolete inventory.”

In this time of both unprecedented institutional and personal investment in the stock market and mutual funds, would we consider a similar strategy with our personal investments? Would we continue to accept losses even though our investment broker was also our best friend? These same considerations should be used with regards to the continued profitability of some of our customers. How often do we hold onto a customer due to prior profitability, personal relationships, or simply out of habit, regardless of their current value to the whole?

Once again, the top customers will represent eighty percent of our revenue and probably receive, due to limited schedules, less than fifty percent of our efforts. A similar inventory can be conducted for customers by assigning a value based on the investment required to maintain them. How often are “obsolete customers” retained at the expense of developing a much more profitable customer next door? How often is time invested with a languishing customer at the expense of a new and very profitable presentation to one of our top ten clients? There are only a limited number of productive hours in the day; every decision relating to time is at the expense of a better use of our efforts!

For six years, I toiled over the development of a new division within our company, spending significant time trying to develop this category. Trade shows, the hiring process, problem solving, and hundreds of hours of staff time were invested in this endeavor. After six year’s effort, the division’s gross revenue represented less than ten percent of the whole. The division was ultimately dissolved, and the weight of the world seemed to pass in its wake. That same year, our company went on to have its largest growth year of the previous ten. The focus was back where it belonged.

There are similar situations where sales organizations try to expand into new sales regions. If, after a reasonable period of time, profitability has not been achieved, move on…quickly! You are certainly not doing the staff members in these regions any favors by subsidizing their income or sugarcoating the job’s inherent lack of potential. What we are doing is jeopardizing the balance of our staff, and their livelihood, by reducing the profitability of the whole!

Business will need to be much more streamlined than in the past. Have you ever noticed how much easier it is to increase sales at the top end of your presentation than it is at the bottom? This is certainly a very obvious statement. Equally obvious is our ability to resolve to focus a much greater investment in these areas by reducing “obsolete inventory.” Don’t the investments that we would consider to be our most valuable deserve more?
Poorly producing “assets” are historically the most time consuming aspects of our business. Could it be possible? Is eighty percent of our productivity invested in “assets” representing only twenty percent of our revenue? Sell the farm, Martha, the barn door was left open…

Personal Regards,

Keenan

INTERPERSONAL© is published by INTERPERSONALBIZ.COM, Keenan Longcor, Editor, ©2010. Duplication of this publication is permitted for both personal and business use. Excerpts may only be quoted with acknowledgment of INTERPERSONAL/INTERPERSONALBIZ.ORG as the source. For re-publication rights, please contact the editor at KEENAN@INTERPERSONALBIZ.COM