A metric that transformed a business

A Metric that transformed a Business

When dealing with a business transformation agenda, one key challenge is to align and manage various moving parts with clarity. In one chemical business unit we achieved this by designing the transformation program around a single common metric. The result- EBITDA moved from -7% to +1% in 9 months. This case illustrates the power of focus while making changes.

It is year 2006 and a large chemicals company in north India is dealing with losses in a couple of business units. While the company is overall profitable, it is particularly evaluating the fate of a B2B setup that caters to small and cottage industry. Closing down the business would mean retrenchment, something that the company does not want. To sell off the business would require the business to at least break even. Since the infrastructure is old, and the technology is not a real differentiator, the company does not wish to invest in CAPEX for revival.

As we evaluate the business, we identify problems in sales patterns, product portfolio, speed of response and overall capacity. The team choses one metric- Earnings per ton as the “North Star”. The team is careful to avoid standard financial metrics like gross margins etc. for 2 reasons- one, to keep it flexible and have an ability to apply across value chain; and two, to avoid leakage of any sensitive financial information.

The next step is to apply this new metric to the product portfolio. Loss making products are identified as opposed to profit making ones. Volume analysis reveals that loss leaders form the bulk of sale as it is both easier to sell and have shorter lead times. These are also the commoditized items that are fighting price wars with local suppliers. The company also realizes that given its cost structure it will not be profitable in commoditized segments and needs to play in specialty market. Stopping loss making products is not a viable option so 3 workstreams are initiated. The first work stream focuses on increasing the production of high margin products, the second on introducing new products and the third on changing the selling habits of sales force. Here we discuss the use of metric for third work stream.

Sales force so far is incentivized on volumes. Going forward, volume is used not as an incentive parameter but as a gate. Only the sales personnel who meet the volume targets are eligible for sales incentive. The quantum of incentive, however, is now determined using a coded MS Excel sheet. The sheet is programmed in a manner that as people log in their sales volumes, the outcome is given as GREEN, AMBER or RED. RED outcome would mean no incentive and GREEN would mean maximum incentive. As this metric is introduced, only about 10% sales personnel are in GREEN and more than 50% in RED. The sheet uses an earning per ton model to calculate the outcome. Now the salespeople can build scenarios to adjust their product mix. Also, as they feed the discount values, they can see the impact on earnings per ton. With this ability to simulate an outcome, the frontline is now empowered to evaluate the trade-off for volume versus the discounts. They can now move their energies from easy sale volumes of low earnings to profitable product mix and take charge of their incentives.

It is 2007, a little more than 5 months since the introduction of the metric. Coupled with other work streams, the results are now visible. More than 50% of sales personnel are in GREEN, only 1 still in RED and the company is breaking even. Yes, there has been a churn in the sale force too. The easy sellers exited on their own and the high contributors are now enjoying better incentives.

Metrics drive behaviors. Are your business metrics consistent with the behaviors you want as a part of your culture?

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