Often times, as leaders, when we talk about the “big deal,” we’re usually talking about revenue. That big win may feel good and be fun to talk about, but can often result in lower profit margins. My sales-driven personality makes it hard for me to say no to almost any sizable transaction. You probably can relate to what I’m talking about. We all know that leadership is responsible for driving both revenue and profits. So, how do you achieve an effective balance?
In the 9 years I’ve been running our company, we’ve had to remain dynamic as we’ve faced economic challenges and market growth opportunities. These influences have caused us to shift our focus between revenue and profits at different times.
Personally, I find it easier to grow top line sales than increasing margins, but as a sales guy, that would stand to reason. There is a standing joking around here that I have a hard time saying no to sales opportunities (see the Scorpion and Frog story below). It’s more fun to grow revenue than to cut costs. There are times when you can justify taking a “skinny deal.” Typically for us, that may mean there is a strategic opportunity, it is a new development account or perhaps a new product or service introduction.
Here are three of the ways we drive revenue growth: 1.) Entering new geographic markets through acquisition or startup, 2.) Expanding in current markets (often requires taking business from the competition) and 3.) Adding new products or services.
I prefer 1 and 3. The hardest way to grow is taking business from the competition – and it’s expensive. Price becomes the dominant factor and the additional opportunity costs can quickly erode profit margins. We’ve been most successful entering new markets through acquisition and introducing new products and services to our existing customer base.
Focusing on Profits
When focusing on profits, the “opportunity” costs often get overlooked. What I’m referring to is could you be focusing your resources on more profitable business than low margin transactions? I often say, we don’t need the practice; so we evaluate if this is the best use of our resources at the time. High-performing organizations are good at managing their resources to find the right balance between revenue and profit.
Profitability requires discipline. The recession forced our company to become more disciplined. We couldn’t grow our top line as we desired due to the economic market challenges, but we could grow our bottom line. So, we did and were able to still provide value to our shareholders during that time.
The challenge is that increasing profitability is not about one big thing like simply raising prices. We know that’s not going to be accepted by our customers as the market sets our pricing. It’s a series of small changes a business makes. It often requires a combination of cost containment, leveraging more effective technology and implementing more efficient processes through continuous improvement systems like Six Sigma, ISO or Lean.
For example, at Marco we changed our upfront project scoping process for professional services so we could deliver higher customer satisfaction and improve profitability. This meant we invested in pre-sales engineers and project managers, which actually did increase costs; but ultimately delivered a higher ROI. This has proven to be a sustainable strategy for us, even though it initially included a significant investment.
I think we can all agree that it is difficult to increase both revenue and profitability at the same time – they are two very different disciplines. Revenue is about doing more and profitability is more about doing it with less. Growth often requires companies to make significant upfront investments prior to any revenue generation. While this initially impacts profitability, effective execution will generate future sales.
Over the past few years, Marco has focused on doing both, setting high growth targets for revenue and profitability. We’re sustaining annual revenue growth rates of over 30 percent, and at the same time growing profits by 20 percent. It does not come easy. But profitable growth is the lifeblood of any organization and is essential to long-term performance. It is fun increasing revenue and focusing on a sales model, but don’t overlook the profit equation.
Tale of the Scorpion and Frog
A frog was about to cross the stream in the jungle. Just as he was about to dive in, he hears a voice from behind, “Hey Frog, wait up!” The frog turns around only to find out that the voice was that of a scorpion.
“What do you want?” asks the frog. The scorpion says, “Mr. Frog, I know that you are going to cross the stream to the other side and I want to do the same. The only problem is that I do not know how to swim. So, can you help me across?” The frog opposes the idea by saying, “You are a scorpion, you will sting me! What is the guarantee you would not?”
The scorpion expecting such a reaction calmly replies, “Mr Frog, you have not got the big picture. If I will sting you then we both will drown. Now why would I do that?” The frog thinks the matter over and reluctantly agrees to give him a ride. “Jump on over,” said the frog.
As they are swimming across, at the halfway mark the scorpion stings the frog. The frog taken by surprise screams, “What did you do? You just stung me! Why? Now we are both going to die! Why?” All the scorpion does is stare back into the frog’s eyes and says, “Because I am a scorpion.”