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:
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.
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.
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.
Solutions360 is a proud sponsor of Navigate Academy. Don’t miss the release of the Module 15, this week, starting with a live webinar.
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