Corporations Waste Enormous Money Every Day

I've been dealing with a number of clients who have been slow in payment. Two of them - one a global publisher, and the other a global telecommunications firm - offer experiences that suggest just how entirely warped most businesses are.

Let's start with the telecom company. It took two months to get a PO, which I received after finally finishing the assignment, which I was supposed to bill in pieces over the time I did it. Two or three times they had me go back and change the contents of the document I had sent to establish the purchase order. Now we're going through multiple revisions of the invoice - which the company had failed to process at all when I submitted it back in early September, and then needed one thing and another added.

Keeping resentment over waiting for income at bay for a moment, let's pretend, for argument's sake, that I was to receive $5,000 for the word. Now let's presume that the company wanted to stretch its payables, effectively making money off the float (the interest it sees on cash in hand). Let's even say that they get a total of 60 extra days of use. At roughly 5% annually, that is roughly 0.4% monthly. On $5,000, that would be $40 in their pocket. But how much does this cost to get? Each go around has involved three people on their staff. Being extremely conservative and saying that each touch of the issue meant an employee spend $25 of company money in time invested, that would be at least 3 rounds total times 3 people times $25, or $225. So, even with the most manipulative of intent, they would be losing $185, or 3.7% of the total of the invoice. The company could have sent a form stating how invoices needed to be formatted, paid on time, and gotten the equivalent of several percent discount.

Another example on the payment front. The publisher has offices in New York. They sign off on an invoice and send it to Midwest office. One or more people sign off on it there and send it back to New York, when then sends it to New Jersey to process a check. The accounting department mails the check ... back to New York, which then forwards it to me. Now, using a more realistic corporate cost of time of $50 per handling, that's $200 to send one check. How hard would it be to use automatic routing? Could it save at least half that cost? I would think so. On the same $5,000 payment, that would be a loss of 4 percent.

Corporations complain loud and long about documenting their controls for Sarbanes-Oxley. And yet few, if any, have used what they have learned to make things simpler and cheaper. So what is the average company losing in potential annual profit? Four percent? Five percent? More? Whatever the number, I'm betting it would translate into big earnings.

Study Suggests Key Ways for IT to Drive Competitive Advantage

Last month the results of a study done by the Hackett Group, a strategic advisory firm, suggested that IT really can be a strategic tool to companies and isn't just a commodity. Based on benchmark data from over 2,100 companies, those that led in IT operations spent more 7% more per end user than the average company. For the average Fortune 500, that would mean an additional $29 million a year.

However, the investment seems to pay off with lower average operational costs of $134 million a year, with IT playing a critical role in attaining the gains, so the total savings is significant. There are five key strategies that the best in class companies use:

• Streamline the number of ERP and other applications and standardize data so you don't spend too much time and money trying to get everything integrated.


• Do risk/reward analysis to find the areas where the greatest gains exist. Be ready to implement process reengineering at the same time if you don't want to simply pave over the cow path.


• Maximize value at the lowest achievable cost rather than simply cut costs across the board. If you just spend less, you might also end up sending less in the areas that can provide real return.


• Make data available in a coherent way to those who aren't computer experts. Let management have access to information that they can use to direct better performance.


• Outsource only to improve effectiveness, not to increase efficiency. In other words, outsource IT systems and functions to increase how well you do something, not how inexpensively you do it.

According to Hackett, these principles can keep executives from seeing IT as nothing but a cost that needs to be trimmed without regard for wht it can provide. If you're interested in more details of teh study and don't mind putting yoruself on a mailing list, use this link.

TV Advertisers Get Taken By Their Own Strategies

The New York Times Magazine had an issue devoted to middle age, and one of the article was called TV's Silver Age. Part way in there is the following paragraph:

Every Wednesday morning, newspapers across the country run a chart of the previous week’s highest-rated television shows. Most television executives basically ignore that list. They have eyes only for subsets of those overall figures, particularly one they call “the demo.” That’s televisionspeak for viewers ranging in age from 18 to 49. The demo may seem nonsensical — after all, what does a high-school graduate have in common with someone becoming a grandmother for the first time? — but it drives the television business.

If your company does or even contemplates television advertising, read that paragraph and the three that follow. They lay out the following history of ad buying:

1. Nielsen audience ratings were once broadly based.


2. ABC, being last in the rankings, decided - strictly as a marketing tactic for itself - to emphasize the 18-to-49 demographic because the network was attracting younger audiences and it looked good.


3. Further, ABC argued that the baby boom generation was vital, because it was used to televion and was huge.


4. Advertisers bought into this and the special reports that Nielsen generated for ABC became the important numbers.
   
5. As demographics shifted, advertisers never got it through their heads that the old arguments for skewing young had less and less credibility.

As a result, the advertiers still look for young audiences without ever considering where the most consumer dollars are available to be had. If you've read through this far, here's the conclusion: folks, you have just been taken for, oh, about 20 to 30 years and have largely been wasting the money your companies entrust you to wisely spend.

How do I, a non-advertising expert, figure I can say this? Because I'm willing to look at the numbers. Now some good news: just because you've done everything one particular way for so long doesn't mean that you can't switch strategies. Here are some steps to at least start moving in the right direction:

1. Redefine your market segments. Make advertising segmentation match your customer segmentation as much as possible. If advertisers refuse, mutter "online ads" and the names of competitors, and that should make their spines bend over backwards.


2. Do some research to show how much per capita spending in your category happens in each of the segments.


3. Create a segment weighting factor. If, for example, 30-to-40 year olds buy represent 40% of your sales, the factor would be 0.40.


4. Compare average spending by your customers to the appropriate segment spending as a ratio. The higher the ratio, the more invested in your company the cusotmers are and the more important they should be to you and where you might be looking for more.


5. For any program, multiply the number of audience members in a given segment by the average category spend. Now you have a first approximation of how much money there is for your type of product watching that program.

Sure, "real" analytics would get far more complex, but you don't need to have a Ph.D. in mathematics to start understanding what is going on. Don't get snowed; get smart.

Michael Dell Says Changes Are Necessary

According to a Financial Times article on April 28, 2007 (sorry, no free link), a leaked memo from Dell has the company's founder and current CEO stating that the company is “a defining moment in its history and in [its] relationships with customers.” Dell replaced his former hand-picked replacement, Kevin Rollins, in January because of disappointing results. The memo suggests some pretty significant changes in direction:

He said their plans were to simplify IT for business and the consumer and to innovate beyond its traditional hardware business. They would also work to fix
their core direct-selling business. “The direct model has been a revolution, but
is not a religion,” he said n the e-mail. “We will continue to improve our
business model, and go beyond it, to give our customers what they need.”

The company apparently wants to "radically simplify IT' for corporate customers and go beyond its direct sales model for consumers, which has done well but that is a limiting factor in growth.

I'd like to suggest that these changes are not what the company needs. Consumers aren't moving to HP because of store sales. Dell has developed a recipe for atrocious customer service. (Disclaimer, I once got so frustrated in trying to get a PC from the company on a timely basis that I cancelled the order.) Trying to chase expanding sales before management really fixes this problem is setting up the conditions for business calamity, because customer service that functions poorly now is only going to get worse with greater demands. And the idea that the company will change IT for companies is a level of arrogance that smart corporations won't tolerate - because they don't have the time, money, or inclination.

Then the Dell memo discussed how the company would "take our supply chain and manufacturing to the next level of efficiency." I've done some pieces on Dell's supply chain in the past and have heard from analysts who closely follow electronic manufacturing that Dell is already pushing so hard on its vendors that some are walking away from doing business with the company.

The amount of efficiency increases in the past could not explain the company's profit level growth compared to the rest of the industry. What seemed far more likely, according to the experts I've interviewed, is that it was beating up suppliers and pulling out every last penny of increased profit it can and telling suppliers to use the increased economies of scale that Dell can offer to make more money off their other clients. But those clients are reportedly starting to balk, because essentially they pay for Dell's ability to make more money.

The short prediction: within the next three to five years, major business magazines will be running "What Ever Happened to Dell?" stories, because you can only push your clients and vendors for so long, and then, as the poet W.B. Yeats noted, things fall appart.