October 1, 2005
By Hank Bulmash, MBA, CA
Dave Jackson, president of Jackson Engineering Inc., and I were in the middle of an annual review of the company accounts. I asked him: "What is your revenue goal for next year?"...
Dave Jackson, president of Jackson Engineering Inc., and I were in the middle of an annual review of the company accounts. I asked him: “What is your revenue goal for next year?”
“I guess it’s about 10% higher than this year,” Dave said. “We’ve usually aimed for a 10% increase. It seems doable and it gives us something to shoot for.”
“But since you raise your fees about 3% each year, you’re really aiming at a 7% increase.”
“I guess that’s so.”
“Setting revenue and productivity goals gives your business focus and energy,” I said. “But setting goals based on a productive business model is better than just setting goals based on increased revenues,”
“I don’t understand what you mean,” said Dave.
“When you model your business, you focus on maximizing your profit. The way to do that is to find clients to whom you provide the maximum benefit. When you provide high value to the right clients, you can charge more and you’ll have a much happier client base.
“You should analyze your clients along three dimensions: (1) Clients (2) Value provided, (3) Profitability. As a memory aid, you can use the acronym CVP for Client-Value-Profit.”
“What attributes am I supposed to be looking for?” Dave asked.
“You want your Clients to be those who are high spending, with repeat work and easy to find,” I replied. “You want to provide significant Value to those clients, so you’ll be important to them. And you want them to be Profitable, meaning they give you good margins and they remain with you a long time.”
“That sounds fine, in theory,” said Dave. “But I don’t think it has a practical application for us. We’re professionals. We charge for the work we do. We keep track of our time, and we don’t play games with our clients. When our clients buy from us, they buy our skill and expertise. It’s not about marketing or client selection.”
“When someone buys your services, he’s really buying a bundle of things,” I replied. “The work you do is part of the package, but so are your client’s feelings about you and your people. Maybe the client likes your sense of humour or your approach to dealing with conflict. In other words, the client doesn’t buy from you solely based on the quality of the work you do. He buys because the work is part of a group of attributes that he’s happy with. The work may be the most important factor — I know it is in your mind. But it may not be the reason your client has selected you. Thinking this way requires a different mind set. You have to think like a businessman, not an engineer.”
“Yes. I see that,” Dave said.
“First of all, you should analyze your client database using all three dimensions,” I said. “You do a lot of work with developers and municipalities. Some of these clients will score higher than others. Those are the ones you want to build your model around. How do you get them to ask for more services from you? How do you pursue other prospects like them? How do you find them? Are they in certain geographic areas where you should concentrate, or in certain core business sectors?
“A CVP analysis will give you an idea of your best clients,” I continued. “You should focus first on expanding your range of services to those clients and second on finding new clients with similar profiles.”
“But in our business almost every decision is made on price,” Dave shot back. “I’m not going to get more work unless I keep my prices low.”
“In that case,” I replied, “the issue really is: how do I get to bid on the work I want? That’s where CVP comes in. Assuming you get your share of work, the question becomes whether or not you should be in the game at all. If the work is profitable at the price you can get, you should be in. If it’s not, you have to become more efficient, develop a new specialty or find a way to add value so your client can accept that the price you charge is fair.”
“Okay, Hank. ‘CVP’ I’ll think about it. It might help us.”
“Business Modeling is a way of bringing the unconscious aspects of your business into the forefront of your planning. Most engineers don’t pay attention to it. But they should.”
Hank Bulmash, MBA, CA is a principal of Bulmash Cullemore, chartered accountants of Toronto. To receive more information, e-mail Hank at firstname.lastname@example.org