New CFO Role - Chief Profitability Officer

Companies suffer from embedded unprofitability. The answer: build grassroots profitability management processes into your company's core management activities

I'm reading the new Jonathan Byrnes book "Island of Profit in a Sea of Red" in which he contends that nearly 40% of the average company is unprofitable, and 20 to 30% is so profitable that it provides all the earnings and subsidizes the losses.

I wanted to share the chapter titled "New CFO Role Chief Profitability Officer" in which Byrnes suggests Embedded Unprofitability is a huge issue in every company and it causes three enormous problems:

1. reported profits are much lower, often half of what they could be;
2. the best customers generally receive only average service, which raises a critical risk competitors picking off the profitable piece of business by offering better service; and
3. the company loses the opportunity to shift resources to the highest payoff activities

He suggests "with the insights that profitability management provides, a company can secure its best business, focus on finding more of the best business, devise targeted measures to turn around the marginal business, and steadily shed the residual unprofitable business that can't be fixed. Not only is it very realistic to eliminate embedded unprofitability but it generally costs almost nothing and quickly generates large amounts of new profits and cash".

The obvious question is "Why isn't this an essential business process in all companies ? Why isn't the CFO - and other top finance managers - involved in driving this ?

The paradox is that there are Barriers to profitability management:

First - Financial and management control information is not structured to surface the problem and opportunity areas.

Second - Everyone is doing something but we miss the huge opportunity that comes from getting the day-to-day activities of the business right all the time.

Third - Many businesses have strong investor pressures that can often constrain managers

Fourth - in most companies, no one is responsible for systematically analyzing and improving profitability.

Sure, a CEO or a general manager is responsible for profitability but most of these individuals are focused on major strategic initiatives, important customer relationships and making sure their key management make budget. The problem of analyzing the profitability of orders, accounts, products and services and improving them through precisely targeted measures, falls between the cracks. This problem has been magnified since function structures have taken the focus away from different stages in the value chain.

So what about CFO's? Well virtually all CFO's, and other top finance managers, are very focused on profitability in terms of meeting revenue and earnings targets. Managing cashflow, acquisitions and divestments are always are play. However its very unusual for a CFO to focus systematically on identifying and rectifying embedded unprofitability, and on building this process into the company's core set of ongoing management activities. 

Introducing the New CFO Role

Business must overcome this logjam and overcome the barriers to effective profitability management - they can by defining a powerful new role for the CFO: Chief Profitability Officer. 

To be successful the CFO must become very skillful at co-ordinated change management in order to be a successful chief profitability officer. He or she must join with other top finance managers to create a new culture of profitability and new business process to support it. The payoff in results and satisfaction is enormous. 

My question for you: Where are your opportunities to find your company's hidden profits ?

 James O'Brien is the  Founder of CFO Accelerator which offers exclusive mentoring and coaching to CFO’s across Asia Pacific.

Go to www.cfoaccelerator.com  for further information and register your details for the monthly email newsletter.

James is accredited in the Business Acumen Gauge from Quad Assessments

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