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Numbers can sometimes be misleading

As a consultant, I was taught to quantify things while giving recommendations to the client.

Here is the reason why – Imagine I am giving a presentation to my client and I tell them the same thing in two different ways:

First, there is high chance you would be generating more revenue as the market is also growing very fast.

Second, your company’s sales increase at average rate of 4% for 8% increase in the market growth. Since research shows that the market will grow at the rate of 8% next year, your sales is most likely to increase 4% next year.

Out of the two, which one do you think is more convincing? Obviously the second one, right? From the second statement, the client has the reason to believe WHY they can expect more Sales!

Hence the consultants heavily rely on Math while drawing conclusions. While math might be true, (if done correctly) it may mislead. Here is an example to illustrate the same. Let’s assume the Revenue of a company to be 10 Million. The immediate reaction would be that, the company is doing well. Do we have sufficient data to recommend it is good? What if the COGS to get this revenue is 11 Million. In this case, the company is suffering a loss which is bad. Hence the revenue of 10 Million alone is not sufficient enough to say whether it is good or bad. OK. Let’s assume Net Income of 1 Million. Math tells the profit margin is 10%. Now, 10% profit margin is good or bad? Again I would say the data is insufficient. Why? What if the profit margin of our company was 17% last year.  In that case, the client’s profit margin is good, but not as good as last year. However, still the data is not sufficient to say if 10% is good or bad because we do not know the profit margin of the competitors. What if the profit margin of competitors is 7% this year.  It means that the entire industry is not performing well and though our profit margin has decreased, our market share has remained constant or it has increased.

Hence the problem is not with numbers itself. The problem is the way we analyze the case using the given numbers. A good consultant is one who asks relevant questions with the given numbers to come with analysis.

bharath

Bharathwaj Mohan

bm@nimble.in

Management Consultant

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Challenge for Profit 1 – Measure & Record

Human beings get motivated by challenging goals. Yet this method of motivation is not much used in many organizations. Setting goals and achieving them requires measurements – Goals without measurements are like dreams and wishful thinking. Getting employees to set goals or even record data requires competency in interpersonal skills.

What to measure?

An organization is an entity transforming inputs into saleable output (tangible or services) using processes. Clients pay for the output delivered to them when it meets their requirements regarding quality, cost, performance, safety etc.

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Measurements can therefore be done specifically for each of the three blocks above. If you have not yet developed a good measurement system, it is best to start at the Output Block, since it directly impacts the customers.

Be clear about objectives

Measurements help in recording data to establish base line. How much product or service is being produced in a unit of time – which can be a shift, day, a week, month, quarter or a year. Knowing the production rate, we can analyze performance trends, performance variations with season, within various teams, within shifts etc. Base line can also be used for bench-marking performance with competitors. It is usual to create ratios of output by dividing it with number of employees or with capital employed or with floor area employed (for example sales per square meter in a retail store) etc. Once these ratios are established, it is easy to set goals to improve them over a reasonable challenging time frame. Providing these challenges to employees provides them with adequate freedom to innovate, show their skills and use  their in-depth ground level knowledge.

Employees will usually come out with many suggestions about how improvements can be done.

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Management Role

Management’s role is to establish priorities for improvements. It is obvious that those improvements which are less costly and would produce immediate benefits be taken up immediately. Necessary change management and execution techniques should be used and teams formed with management constantly providing support and review. Keep in mind that improvement requires time of employees and if they are already overworked, it would not be possible for them to deliver the expected goals. It is management’s role to provide resources and support – this requires a definitive mind set of the higher management who should decide whether or not they value a culture of innovation, growth, challenged and engaged manpower or wish to continue business-as-usual.

It is vital that once management decision to go for measurements is taken, the projects which are easy and quick are attempted in those pockets of the organization where positivity and team-work is better than average. Once results are shown and communicated to all in the organization, it sets the pace for fence-sitters to join the organizational efforts to make the organization a place worth working in.

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V K Mehandru

vkm@nimble.in
CEO