KVI Series – How Well Do You Do What You Do?
In the beginning, before any formal structure to your business existed, there was an idea. Imbued with expertise, ambition and hope, and probably a touch of naivety—this idea transformed into what would become your offering to the marketplace. Whether it fulfills a previously unserved need, improves upon a current market, or even creates a new one, this offering stands as the core of your company.
As any business grows, it can be assumed that over the years it becomes better at what it does. Time spent and experience gained in the field helps this occur naturally. Extensive market analysis and business refinement causes this expertise to develop at a much more strategic pace. But what if there hasn’t been a review of your services or products since the early days of your business? Everyone is quite familiar with the pull to work within the business over the need to work on the business. However, it can’t be repeated enough—there is great value in the analysis and enhancement of your portfolio of offerings.
When looking for those value drivers, the first metric for analysis is expertise. In other words, how well do you do what you do? For the majority, the idea to bring your offering to the world didn’t come from being an expert at something else. Employees typically aren’t hired because of unrelated experience; and technology isn’t implemented that serves a different purpose. The hours spent honing your craft and building your business are designed to achieve the initial intent. How successful have those past efforts been? And how successful are they projected to be? Maintaining your expertise is critical. How much attention is given to comparative analysis, improvements, and further education? Customer testimonials, industry certifications, and association awards all speak to how well your business is doing and the level of expertise at which you do it.
Another driver of value is an assessment of the scope and size of your offerings. It is entirely possible to have too wide a scope of services, and equally possible to have too narrow of one. The same is true of your product offerings. The objective is to find the breadth of scope that is most compatible with the size of your company, the nature of your market, and the geographical area served. As you regularly analyze how well your offerings are meeting the needs of your clientele, look for areas where you can strategically expand. Are there overlapping synergies in a new product line? Are there nearby regions that have similar service needs not being met by competitors? This strategic approach to your offerings tracks closely with increased company value.
There are also ways to monitor how well your services and products are performing from a profitability perspective. An obvious, and popular, measurement is to break out Gross Margin per service or product line. These metrics get reviewed quite regularly. However, a more in-depth analysis, though often discounted, would be a comparison of how each line contributes to the bottom line. For example, let’s say your business has 25 service or product lines. For the sake of simplicity, each line contributes equally to Gross Profit. With approximately $5M in G&A expenses, and all things equal, each line uses $200,000 of indirect overhead. This sets a simple mark suggesting that each line needs to contribute $200,000 in Gross Profit to be accretive to earnings. This rudimentary example demonstrates the beginning of a method for analysis against Net Operating Income and your bottom line.
While it is far less common to break out Operating Expenses this way, and it can be quite complicated because all things AREN’T equal and certain assumptions need to be made; it matters because it can give great insight into which offerings are and aren’t contributing to company value. When a service is low-margin the true value of that service must be assessed. The same can be said of a product operating at a bottom-line loss. Sure, there are plenty of reasons for a company to operate in such a manner: the business is building expertise in a new field, sector or industry; or it is part of a new line or expansion into a new region. The objective here is to know the margins you are currently operating at, know the reasons you are operating at those margins, and have a realistic forecast of what the potential and future will be.
Other value drivers for your offerings exist, and they typically revolve around the company’s ability to improve its offerings. This improvement typically involves advancement in technology or in a process that allows for greater productivity. Services enhanced to more closely and efficiently meet customers’ needs. Product line improvements that reduce operation time and cost. New training to keep employees up to date with expected advances. These are a few of the many examples that suggest a company reviews, upgrades, and grows their offerings. The key, as with the other value drivers, is to make sure the improvement can prove out with a gain in value.
There is plenty of analysis to be done to ensure that your products and services are driving company value in a positive direction. The goal with such an analysis, true to the original intent when starting the business, should be to create a menu that meets the needs of the market it serves; one that encourages healthy growth and builds sustainable value.