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Eight ways CFOs can regain control of margin

MAINTAINING or increasing margin is seen as vitally important to organisations that report growth ahead of market expectations, according to survey of chief financial officers.

The report, from performance business Vendavo and Cranfield School of Management, found that that those who report growth ahead of market expectations are more likely to say that maintaining or increasing margin is vitally important (41%) to their organisation, in comparison to those behind (4%).

Despite striking evidence that a lack of insight into margin is damaging shareholder value and the financial health of organisations, more than a third would not know how to affect an increase in margin tomorrow.

To help organisations take positive steps, Patrick Reinmoeller, professor of strategic management at Cranfield School of Management, has proposed an Eight Actions Model to help organisations increase margin and perform ahead of market expectations.

Increase awareness of growth drivers
Raising margins drives growth. CFOs and CMOs at growth companies that raise their margins yearon-year are more likely to report that their organizations outperform market expectations (31% compared to 16%). Create certainty about what drives your growth by gathering data to challenge your assumptions.

Focus on margin

Leaders set priorities. Company leaders who see their companies growing faster than market expectations report that their growth companies are more focused on margins. For these companies, 41% of the respondents emphasize that maintaining or increasing margin is vitally important, compared to only 30% in all companies. CFOs and CMOs need to devote more time and resources to managing margins. Without their leadership, lower levels in the organization may try but fail in helping the company focus on success.

Margin pressures

Margin pressures

Create a common ground

Surprisingly, companies handle on average seven different definitions of what margin means. These differences give rise to misunderstandings and misalignment and prevent an effective focus on margin. What is needed is clear language, a shared view and meaning of what margin is and how it is achieved and can drive growth. Capture the state of confusion about margin in your board room and in your company, visualize it to motivate discussions and develop a shared understanding to finally make margin meaningful.

Analyze how to increase margin

While executives of companies that lag behind expectations frequently do not know what to do or how to increase margin, leaders at growth companies actively manage margins. They have experienced working with different tools and used different profit levers. Unfortunately, their focus and their experience in the last five years has been biased towards cost cutting. Going forward, company executives need to acquire strategic capabilities that allow them to expand margins by reducing costs and raising prices by creating value. Increase how mindful people are about what influences margin; organize customer encounters, field trips and ‘pauper’ experiences to raise employees’ awareness. Rigorously analyze the large volume of structured and unstructured data already available to identify the key levers of margin after addressing additional data needs.

Tools to manage margin

Tools to manage margin

Open the data vault

Provide accurate data and insight through systems and reports for larger numbers of employees. Opening access to data is similar to smart altruism, the giver will be given. At growth companies, more than 75% of the respondents are happy with the accuracy and insight provided by systems and reports meant to help with margin management. The strong association with data quality, user satisfaction and ability to grow business through margin management, clearly needs further research and clarification. Yet, providing intuitive tools that offer those making the critical judgments with better insights appears to be important in raising the level of how organizational knowledge is created and deployed. Remove the bottlenecks quickly. Identify which employees, aligned to the levers identified above, currently have the strongest need for access to data. Provide them the insight they need to broaden margins.

Offer data that matters

While large volumes of data can be good, its relevance is paramount. When sales teams make decisions they are engaging with customers, often long standing relationships, and they rely on gut feeling because often not much evidence is available. As the study shows, supporting decision makers at all levels to exert better judgment based on better data, that is accurate, timely and specific is a great opportunity all companies can seize. Happiness of employees with big data, data analytics and margin management programs depends on the quality of the data. Ensure that employees receive the data quality they need to make better decisions in real-time.

Help client facing employees exert better judgment

It is essential to link information and intuition. The study shows how important changing the scope of corporations is to influence margins together. However, it is also clear that the high availability of more abstract KPIs could support corporate decisions that carry a high risk but it could also nudge decision makers to consider these high risk options more. The further we approach individual clients, specific product-market combinations and take client relationships into account, relevant data becomes progressively scarce. Many organisations suffer the lack of language, tools and skills leaving gut feel and the status quo as the only points of reference. Better judgment needs overview, parameters and grasp of detail over time. Shedding more light on the facts at the level of detail needed for negotiations and client interaction requires a common language, understanding and desire to raise the game. Enhance hard and soft skill of employees; they help them to rely on their intuition with even greater success.

Ensure that awareness, analysis and action are linked

Awareness, analysis or action are not enough alone. Providing data alone without meaning, offering analytical results without guidance on alternative options to take is not helpful. Continuing and letting gut guide action is equally unwise. Awareness, analysis and action (Triple A) need to inform each other. This requires creating overlaps, sequences and loops; continuous spiraling generates better judgment in the crucial moments when customers make a decision about your company`s margin.

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