There are several key components in the FP&A role. The way profitability is analysed and...
Navigating the Politics of Product Profitability
Many commercial finance or FP&A professionals focus on getting the model right and not enough time considering the how people are going to react to the outcome. This blog sets out a few tips to navigate the politics. In the words of Oscar Wilde ‘The truth is rarely pure and never simple’.
Not just about the model
Over the past twenty years I have come to appreciate how challenging the product profitability process can be and I’m not just talking about the intellectual and operational challenges involved in creating a profitability model (although that is tough, as is evidenced by a couple of articles written in the Harvard Business Review, 30 years apart - HBR 1988; and HBR 2017.)
I am talking about getting an organisation “bought into” using cost allocation and product profitability tools in the right way.
Winners & losers
Product profitability creates winners and losers. Its creates winners and losers for products and more importantly for the teams behind them. Consider the following:
- Do your colleagues typically want to work on the higher or lower margin products
- How easy is it to get marketing spend or systems/product enhancements for lower margin products rather than higher margin products.
So the outcome of a product profitability review can be a high stakes exercise at a human level. And if you are on the receiving end of a low margin product, its unlikely to go down well. You’d want to make sure the calculations were correct, right?
You’d want to understand
- If your product opens doors for other sales opportunities, how that is taken into account
- If sold as part of a package, how have discounts been distributed.
And if that doesn’t provide satisfactory answers, there is always
- How did you allocate fixed or semi-fixed costs.
Enter, stage right, your commercial finance/ FP&A professional. They have done the best they can, possibly with not so great systems tools. Also certainly they are juggling a number of priorities across a month end cycle, have limited time, bandwidth and access to information to build a profitability model. And of course, even as seekers of the truth, they have had to make a series of assumptions to get something delivered.
And this is where there is a danger, because oftentimes the allocations are part art, part science. Unless there is some degree of understanding & buy-in at a senior management level of how costs are allocated, it is always going to be difficult to make use of a product profitability exercise.
What should you do?
So the key is preparation, putting in as much effort to building a technically accurate profitability model as to managing and communicating with stakeholders around you.
1. Understand the business and its preconceptions of profitability
Get close to the business ideally through your finance business partners. It is worth investing the time to understand first-hand how the business operates and the operational drivers behind the products/ services. The link below points to a joint study by ACCA and KPMG on cost allocation, highlighting the importance of people and culture in creating an effective approach to cost allocation, ACCA KPMG Cost allocation.
It’s also helpful to understand what are the existing preconceptions around product profitability, so at least you know what you are up against once your work is complete.
2. Line up your stakeholders
Put together a loose internal communications plan, outlining key stakeholders (Identify those who have skin in the game – who is likely to be unhappy and engage with them first).
The more involved business stakeholders are in shaping the model, the more likely they will be to accept the results and start using the model for better decision making. That includes getting your key (simplifying) assumptions out early and agreed amongst senior stakeholders.
One of your stakeholders is going to be your CFO and whilst they are crazy busy, I’m afraid they do need to understand a lot of the detail, so getting into their diary is a priority as you start building your model.
3. Sell, sell, sell
This may not come naturally! However, the outputs need to be sold internally and all of your finance colleagues can help. The key is to have a single document outlining
- Main strengths of the tool, including how it can best be used e.g. scenario capability and benefit of trending over time
- Interesting insights from any analysis (“did you know that …”)
- Rebuttal points on perceived weaknesses and assumptions including some realism on where levels of accuracy become spurious e.g. at a factory or category or channel level.
Armed with a single messaging playbook, you and the finance team should aim to present the product profitability outputs to as broad an audience as possible, in a systematic way that would make your sales team proud.
Concluding takeaway – focus on the people
There is no denying that delivering a product profitability model can be a torturous process but it is equally important to get your audience involved, educated and ready. Hopefully, this blog has got you thinking about what tactics you can deploy to achieve that. I’ll leave you with another quote from Oscar Wilde: ‘Success is a science; if you have the conditions, you get the result’.
The article was first published in Unit 4 Prevero Blog