We were a division of a large public company and one of my largest SaaS product lines had decreasing margins for 3 straight years.  I agreed with the executive team that the industry was consolidating but didn’t agree that this was the sole reason for the margin drop from 33% pretax margin down to below 10% (which was received from the latest budget for next year).  Still not liking the answers to my inquiries, I decided to perform a deep dive into the operation to turnaround the operation and target a 15-20% profit margin (I called the analysis Project 15).  I leveraged my accounting team to provide me backup, including contracts, sales plans, commissions, COGS breakouts.  I looked at three key areas:  1) Sales, 2) Direct Costs and 3) Overhead.  I published my findings to the executive team of both the parent company and the product line simultaneously.  The goal was not to throw anybody under the bus but to get better results. 

My deep dive into the operation yielded the following discoveries and recommendations:

Sales

• I discovered guaranteed bonuses usually only given to sales executives at the start of a job for a short period.  Some of these executives have been with the firm for over 2 years.  I recommended these all be discontinued.

• Sales executives were paid based on renewals and new business.  Each account had a salesperson assigned to it.  When a salesperson left the organization, his accounts were allocated to the others.  The path of least resistance for sales was to maintain existing accounts and, as a result, our retention was good (also, our product was very sticky) but we had little new sales.  I believed we were paying a premium for account management with the average sales contract 3 years.  I proposed that accounts after 3 years old become “house accounts” and to bump up the commission for new business.   Our sales team was living on retention with little focus on new sales – and I believed our focus needed to be towards new customer acquisition.

Direct Costs

• A few years ago, we invested heavily in customer service to address “gaps in the product” according to the executive team.  It seemed to make sense at the time, but I discovered that our customer service costs have risen consistently while the number of customers on the platform had decreased.  I recommended that customer service costs scale at a consistent metric to agents served. 

• Development costs had continued to increase despite a heavy investment to improve the product a few years.  If we did improve the product then a lot of the original shortcomings should be addressed and development costs should be reduced to maintenance (besides, theoretically, a reduction in customer service costs above).  Our development efforts need to be monitored to ensure they are necessary and reduced as we are now in a maintenance mode with the product; I also believe we should consider outsourcing low-end development.

Indirect Costs

• We had a print shop that we had challenges keeping busy and we had tried a variety of things to allocate print needs from other groups to help the shortfall.  These efforts failed and the print shop was costing us $250k/month, so I asked the question about why we have it.  I discovered that our contracts have a requirement to print out data books if the customer requests it (at an additional charge).  In the digital era of today, only 2-3 out of hundreds have requested this done as most request a data file.  My recommendation was to close the print shop immediately, modify the contracts to exclude this language going forward. If a customer wanted the printed book, we outsource it at the time.

• The operation had reduced staffing a few times in the past but still had a large facility.  The final recommendation was to consider subleasing the unused portion of the facility or move the operation to a smaller and cheaper facility.

The big hitters here were reducing the customer service costs and modifying the sales process to incentivize new sales.  After implementing many of these changes, we succeeded in doubling profit margins above 15%.  My findings were not brilliant deductions but common-sense findings that only occurs when you are critically looking for inefficiencies or things that just don’t make sense.  Overall, my take on these changes is that the executive team took the eye off the ball and failed to modify the operation as the times changed – and I believe it happens all the time.  This is the argument to constantly question what you are doing and re-engineer constantly.  The world changes fast and either we change with it, or we fall behind.  The impact here wasn’t just on the current year, but it was going on for years and it would possibly have continued if I had not created Project 15.  Conclusion:  If you do not like the answers you are getting – it may be time for your own investigation and turnaround plan to obtain the results the organization requires.