Congratulations. Your business is stable, you’re making decent money.. it’s going great.
Until it’s not.
A key client leaves. Sales drop off and growth flattens. Your costs go up or your supply chain is disrupted by a trade-war.
Suddenly you have to fill a big hole in your profits.
You have to change something. You have to raise revenue, cut costs – perhaps you need to do both. Almost every business leader and executive team is faced by some variation on this scenario. It’s part of business but the problem can become a whole lot worse if you make the wrong decisions. Cutting costs in the wrong place can happen very easily, particularly if you cut costs in an area that (directly or indirectly) impacts your customers.
Most business leaders take a functional or line item approach to running their business. Their executive team is made up of functional leads who are experts in what they do. Decisions are made with a functional perspective.
The problem with a functional approach is that financial and customer outcomes are achieved through processes that cut across functions. The actions of one function may impact another function “down the line” with less than optimal outcomes to customer or the bottom line.
All businesses need a clear understanding of what I call the “profit impact matrix”. This goes beyond an understanding of the P&L. The profit impact matrix defines desired outcomes (customer and financial), maps the end-to-end processes that deliver those outcomes and identifies the functional touch-points during each process. The profit impact matrix also identifies the key process performance indicators and outputs of each functional engagement with the process.
The profit impact matrix gives business leaders a cross-functional framework for making business decisions that are informed by a clear understanding of impact on outcomes. Understanding how processes work and deliver outcomes gives leaders an opportunity to optimize processes and evaluate functional trade-offs in the context of business and customer outcomes. The profit imact matrix provides a framework for cross-functional understanding and optimal collaboration at every level of the organization.
In summary, the profit impact matrix gives business leaders a new tool to maximize the value of their business .. and a framework against which to evaluate these hard decisions that sometimes need to be made.
