Take a Look in the Mirror.
Sometime in the middle of COVID lockdown, it happened. It could have been April; it could have been June…time runs together when you’re trapped inside with three young children and a company to run during “uncertain times.”
I thought it would be easy. I’d seen it done so many times before. I thought I’d just make a few cuts and voila! Success! But a few cuts led to more cuts which led to more cuts…and suddenly I lost sense of direction and became obsessed. I wanted to be successful by myself. I could do this.
I stood back and looked at my reflection. I couldn’t deny it any longer. I had failed.
I had given myself a COVID haircut.
In that instant, I understood the drive of an ambitious leader wielding 80/20, alone, for the first time. Making cuts to save the disaster of other cuts. Perhaps becoming more and more fixated on his/her own success rather than the success of the company. Perhaps being too embarrassed to ask for help.
From an outside perspective, 80/20 seems so easy. Do a Pareto Analysis to determine customer line simplification and product rationalization. Sit back, reap profits. Who needs outside help?
In truth, 80/20 is so much more than a cutting exercise. A Pareto Analysis is just the tip of the iceberg. Just a Pareto Analysis alone may show you your long tail of customers and products, sure. But, it doesn’t show you strategic direction. It doesn’t tell you how to handle these customers and products properly, communication strategy, or how to deal with change and more importantly, culture.
But unlike a bad haircut, the responsibility of an 80/20 disaster is easier to deny. “It was the team, the market conditions, the economy…” are easy excuses to shield oneself from the truth. But eventually, every leader will have to look in the mirror and take ownership of the mistakes he/she made. And seek professional help (as I had to do after my COVID haircut).
I hear it repeatedly. “We’re going to manage 80/20 alone.” I resist the urge to scream “Nooooooooooo!” as if the person told me they are going to skydive without training or a parachute. I fear for these people. We’ve seen far too many companies make critical mistakes when implementing 80/20 without guidance from people who have done it hundreds of times and learned from these exact mistakes. It’s not because we’re smarter (remember, I am the guy who cut his own hair). It’s because we are more experienced. Our team has gone through the process hundreds of times with hundreds of different businesses and has delivered results without fail. We’ve seen the pitfalls, mistakes, and best practices, and can navigate the course with confidence…and accelerate profits and market share growth.
For my friends who are out there doing 80/20 alone, Godspeed. But, it’s time to take a look in the mirror.
We bring you, The 80/20 Self-Assessment.
First, consider some red flags
- Do you think 80/20 is about product rationalization? Did you start with products?
- Have you fired 50% or more of your customers without thorough evaluation?
- Did you fire a potential whale that should have been identified as a target to nurture?
- Have you walked away from a large account because you thought it wasn’t profitable?
- Do you measure the profitability of accounts using percentages (e.g., gross profit percentage)?
- Have you implemented “across the board” price increases?
- Did you start the improvement process in Quad 2, 3, or 4?
- Have you made a significant change without a dramatic improvement in profits and growth?
If you answered yes to one or more of the red flags, chances are you need to stop and get support before it’s too late. Don’t wait until 80/20 becomes another failed flavor of the day. Don’t believe me? Check out the following KPIs.
Key Performance Indicators
There are many KPIs that will measure your organization’s health. We recommend starting with these. After all, we regularly measure and assess these with our clients to make sure that we are on the right track.
Strategex Key Ratio™
The experts of Strategex’s 80/20 consulting practice developed the Strategex Key Ratio™. The Strategex Key Ratio™ serves as a benchmarking tool, a measure of continuous improvement, and a prescription for what actions to take for improvement. A recent client who implemented the Strategex Key Ratio™ combined with 80/20 increased their EBITDA by 6% and quadrupled their stock price. And this is just one of the hundreds of success stories in the Fortune 500 space.
If you are practicing 80/20, you should be measuring your key ratio over 16 quarters and seeing an upward trend (numerically above 2.5). You need to be working in the numerator – that is you are working on the growth side.
Profit Flow Through
Is revenue growth flowing through to operating income at near gross profit levels? For example, if you’re a manufacturer, and the cost of goods sold is 50%, if you grow top-line revenue by a million dollars, close to $500K should flow to the bottom-line.
Outgrowing the Market
If your market is growing at 4%, we want you to be at 10% or more. Don’t rest on the growth of the market. We want you to have an UNFAIR share of the market.
For example, we’ve seen companies enthusiastically report their growth was at 20%! But, upon further inspection, the market grew 21%...despite growth, they were losing market share.
ISOTIF for Top Customers
For your top customers – your accounts that deliver over 89% of your revenue – your ISOTIF (in-spec on time in full) should be greater than 98%.
Additionally, your top customers should define the ISOTIF. Too many people think an ISOTIF of 98% is good, but they are measuring their promise as opposed to customer needs. Too often we measure by when we promise, but Customer Experience (CX) greatness is to deliver when the customers want it.
NPS of Top Customers
Your entire team should aim for an NPS of 100 for your top accounts.
We know. It sounds unachievable. But, let’s aspire to achieve greatness at top accounts! You should at least be trending toward 100… a recent client was touting their NPS 35 as a strength because it was higher than the industry standard of 32. We had to ask, “You’re okay with more than 65% of your top customers being passive, at best?”
80/20 companies don’t strive to hit industry standards at top accounts; they know they must deliver a top CX. It doesn’t happen overnight; it’s okay if you’re at 80 and working your way up.
Rule of 40
We love the “Rule of 40” as a KPI. It provides a balance between focus on margin improvement and growth. Your op profit % + growth % should be approaching 40 and improving every quarter AND there should be growth. Too often, people try to get to 40 by increasing operating profit at the expense of growth (or vice versa).
Look in the Mirror
So, how did you fare? There is no “grade” – every company will score differently. But it is important to measure your trend. You need to be on a consistent upward trend in all of these areas. What do you do if you’re not on an upward trend? You have to know when to ask for help – get a proven 80/20 expert to coach you so you can become an even better leader. The best athletes, CEOs, artists have one thing in common: great coaches and a dedication to excellence.
Get the data. Look in the mirror. Be honest with yourself. And by all means, don’t cut your own hair.
David Philippi is CEO of Strategex. His expertise includes 80/20 execution, product development, and market analysis to drive profitability.