Understand the Power of Variable Costs

Posted on January 11, 2021 in Around the Web ,Blog by

 

Integrators that understand the power of variable costs know that every dollar saved goes directly to profits.

Understand the Power of Variable CostsThis is Part 1 in our new blog series from Joel Harris, which explains the power of variable costs for your integration business.

More than 20 years ago, I discovered the hidden profit enhancement found in focusing on reducing overhead costs, and on making certain that direct costs were truly variable costs.

My company had acquired a failed roll-up with a national footprint, with great customers and good revenue for its size. Yet the company was losing millions of dollars (even with the large depreciation and amortization costs excluded).

The acquired company’s strategy had been two-fold:

  • Build out a national service offering, and
  • Develop new products for its national customer base.

On the surface, these were two great strategies. However, this led to a bloated national field labor force that was under-utilized (install and service), bloated fixed costs for R&D and a centralized service desk, along with the associated administrative and multi-layer executive teams.

My company took two actions that turned this loss into a multimillion-dollar profit in the first year post-acquisition:

  • First, we eliminated all fixed costs that were not essential to the providing existing customer services.
  • Second, and even more impactful, we transformed all our “fixed” direct labor costs into truly variable costs.  We did this by offering under-utilized employees the opportunity to set up their own subcontracting firms where we guaranteed them a minimum revenue based on average hours of utilization with the freedom to offer install and service in their local markets. With this decision, we turned all our direct costs into truly variable costs and ensured every project or service contract was profitable on its own merit.

This action obviously drove up the total net profit from our project sales and service revenue, since we no longer had a few profitable customers carrying the weight of other project losses.  We did not stop there, and for the next 20 years, we were able to grow profit by greater than fifteen percent annually.

You can reduce fixed overhead and variable costs, AND grow at the same time!

While the above scenario or solution may not directly apply to your business, the principles of reducing fixed overhead costs and making your direct costs truly variable will unlock a hidden treasure of profitability with no change in your existing revenue stream.

Stay tuned for Part 2 in this series, when Harris does a deeper dive with examples of where a variable cost structure adds profitability to your integration business.

 

Joel Harris concurrently serves as a Strategy and Business Consultant with Navigate Management Consulting, and the COO for HB Communications.

 

This article comes from our partners at Navigate Management Consulting, and has been republished with express permission.

Read the original story here – Profits Hiding in Plain Sight

 

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