A Better Way to Profitability in Today's Downturn: Protecting and Leveraging a Firm's Core Assets
by John G. Carlson

Here we go again. The current economic downturn, and that especially in high tech, has brought out the usual set of cost cutting actions. Staff reductions and downsizing are occurring worldwide in all industries. But is this the best way to maintain or enhance profitability for a business with a future?

Staff reductions and downsizing are the standard way executives deal with declining profits. However, wholesale cost cutting carries direct costs for implementation in addition to lost revenues and hidden costs that further reduce profits. These risks to corporate valuation are huge and need to be identified up-front before such "corrective" actions are taken.

A better way to achieving the highest profitability in today's downturn involves identifying and valuing a firm's core assets, and then protecting and leveraging these assets. Some progressive firms are utilizing this approach in responding to the downturn. Selective cost cutting rather than wholesale cost cutting is the focus. Effective cost cutting balances current and future revenue generation as the number one corporate priority.

Revenue Models based on Core Assets:

Revenue generation today is commonly focused on customer selling programs and product development efforts or the implementation of new management systems. Identifying core assets critical to revenue generation, and then leveraging them, often produces more beneficial results. These core assets include:

  • People, both employees and customers
  • Intellectual Property defined very broadly
  • Technology

Through this "asset-based" perspective, executives generate new revenue models from core Human Assets, both employees and customers, then further leverage them through their valuable Intellectual Property Assets and Technology Assets.

New ways to increase revenues are obtained by identifying the core assets most critical to revenue generation - from selling functions and customer service to service delivery and support functions. Oftentimes the most valuable people are not managed appropriately or even recognized as being instrumental to revenue generation. The same is true among a firm's out-sourced suppliers and service providers where cost cutting and downsizing can destabilize the supply chain impacting customers and eroding revenues.

Adding up all the ways revenues can be increased by better operational management of Intangible and Tangible Assets is where successful companies need to focus during times of business slowdown. With the growth frenzy now over, executives have time to carefully rethink how to better organize and operate their business, rather than reacting to shareholders without a coherent master plan for sustainable profitability.

Cost Models based on Core Assets:

Just as executives are able to rethink their revenue models based on their core Intangible and Tangible Assets, they can do the same with their cost models. A firm interested in protecting its profitability during a downturn builds its costs up systemically from its core assets, not from around the fringes based on financial reporting mechanisms geared to narrowly defined, current period cost elements. Otherwise, costs cut in one area commonly result in higher costs in another area of the company or in a future time period.

Well-designed cost models provide a systemic view of the enterprise that allows cost reduction targeting to balance critical relationships between cost elements and between costs and revenue generation. Through such modeling, certain administrative and support functions may be deemed core assets, whereas certain R & D and Information Technology programs and staffing may not be.

Today's networked organization is more dependent on the quality of its customer service operators, help desk staff, and billing and payables clerks than is commonly realized. These people play a key role in managing smooth business process flow and in projecting the company's good name to customers and suppliers and service providers.

Yet customer service, support and administrative functions are the areas reduced or outsourced during difficult times. Instead, selective upgrading of management practices while adding the right tools and human supports for these functions is the best way to leverage Human Assets, enabling more business with fewer people even as the people in place are managed and treated better.

The trouble today is that many firms are not designed based on careful modeling of core assets to ensure the lowest possible cost structure while ably supporting revenue generation. Instead many executives have bought into a flawed organizational design in which Human Assets are not valued. This is not appropriate for today's people-dependent, technology-based services businesses.

What appears to be a low cost structure and related staffing model is often a high cost one when all the direct, indirect and hidden costs and lost revenues are layered in. Employee disloyalty, continuous turnover, hiring and firing activities, training and retraining, legal costs, theft, damage and even sabotage of equipment, software and a firm's Intellectual Property (including its good name) degrade and even destroy a firm's margins.

New approaches to cost modeling generated from a firm's core Intangible and Tangible Assets demonstrate how these wasteful costs embedded in corporate margins can be eliminated, or at least minimized, and should not be allowed to be part of any firm's operating plan.

Profiling and Valuing Core Assets:

Firms are extremely careful in tracking and valuing financial assets, and they are somewhat focused on tracking and valuing Tangible Technology Assets. The same cannot be said for Intangible Assets, i.e., their People and Intellectual Property.

Usually these critical assets are a hodgepodge with no comprehensive view available for executive level management. Worse still, the management that does take place is indirect, "siloed" by department or function, and complicated and fragmented by delegation to Human Resources, legal staff, and outsourced service providers. Increased costs are the result.

Profiling and valuing Intangible and Tangible Assets provides a complete view of people of all types, including employees, contract staff, consultants, customers and key employees of suppliers and service providers. There is a high degree of untapped business leverage for increasing profits from managing these assets and critical relationships better, while staff reductions and increased churn of people do the exact opposite.

Similarly, a complete view of Intellectual Property allows senior executives to put their arms around their IP both strategically and operationally to better manage Intangible Assets of all types. A firm's Intellectual Property includes:

  • Patents
  • Unique software code and content
  • Critical data and documents
  • Business process and logic
  • Human process focused on relationships
  • Accumulated knowledge and experience of your people
  • Trademarks, copyrights, brands and your organization's good name

Firms increase revenues while reducing costs by bringing a strategic, company-wide focus on profiling and better managing valuable Intellectual Property scattered in people's drawers, heads and laptops. This is accomplished through better operational management focused on protecting and leveraging assets of all types. Patenting, licensing and partnering only really work when all of a firm's Human Assets and relationships are well managed.

Executive Focus On Operational Best Practices:

Executives naturally focus on Wall Street, financing activities, their markets and industries. Many have not been fully involved in operational management principles and practices during their corporate career track and MBA programs. Making this shift to building revenues and costs up from core assets actually simplifies operational management even as it becomes systemic.

When a comprehensive profile is obtained and then supported by new revenue and cost models generated from core Intangible and Tangible Assets, executives have enhanced means to increase margins and profits, usually with minimal added investment. Operational improvements eliminate the barriers, bottlenecks and gaps in how core assets are managed.

Performance-driven executives shouldn't target wholesale staff reduction when trying to manage profitability in a downturn except as a last resort. Profitability improvement does not come from downsizing. Rather it results from better operational management focused on protecting and leveraging a firm's core assets.


John G. Carlson is the founder and President of System Change, Inc., a methods-based consulting firm featuring Assessment Services. The company's URL is www.systemchange.com . John can be reached at jcarlson@systemchange.com .

Also by John G. Carlson - The Unrealized Potential of the "New Economy": A More Profitable Business Model | See also Creative Leadership and Leading Change in The CEO Refresher Archives

   


Copyright 2001 by John G. Carlson, System Change, Inc. All rights reserved.

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