This week, I bring you news from the road. I am in St. Louis and Kansas City.

The 3rd Quarter meeting of ABM SMART just ended. (This acronym stands for Activity-Based Management: Subject Matter Advanced Resource Team, formerly the ABM Advanced Implementation Group.) Currently in its 10th year, this network of experienced ABM practitioners continues to explore ways to improve the value that members can provide their organizations. Advanced implementers share deep insights and working sessions with the country’s foremost cost management thought leaders. Past presenters include Charles Horngren of Stanford University, Robert Kaplan of Harvard, Robin Cooper of Emory, authors Mark Graham Brown and Jim Brimson, and many others.

This meeting featured Derek Sandison of PM2 (and former founder of ABC software provider Sapling, which Hyperion purchased in 1990). The focus was on using Customer Profitability to recapture lost opportunities. In many cases, 20 percent of your customers generate over 150 percent of your total profit. Unfortunately, the remaining 80 percent are a combination of break-even to accelerating losses. These customers wipe out one third or more of your profit. The key to reversing these results is learning to identify which customers lose money, why they lose money, and what you can do to change these results.

Sandison identified several areas that can cause customers to drive lower returns. These are headlined by diversity in that customer requirements may not match how you have organized your service delivery approach. This could include lower-than-average order size, special handling needs, and greater utilization of your auxiliary services such as engineering support or product consultation. As a result, these customers drive greater-than-average expenditures, which can negatively impact profitability.

In theory, this greater customer customization should lead to a tighter relationship resulting in higher profits. In reality, customers often take these services for granted, valuing them at what they pay — nothing extra.

In extreme cases, these unprofitable customers may be your largest customers. These high-volume customers often use their purchasing volume as a lever to gain greater support from a vendor while simultaneously driving lower margins. This combination can leave organizations very vulnerable to the demands of these large customers. Some organizations have allowed certain customers to grow to the point where the organization is totally dependent on one or two customers. At that point, your organization has lost control to those customers. Like the federal government’s bailout recipients, these companies have become “too big to fail.”

What are your plans for learning to better understand customer profitability and for developing ways to harvest your best customers and manage unprofitable ones? ###