By Rick McPartlin
Want to talk about recession? I just came back from my high school reunion in Detroit, and trust me: Detroit knows recession.
And, as the poster child for recession, Detroit is also the new model for NORMAL!
From 1945 until 2007, North America was floating on a bubble. The rest of the world was in no position to compete in the car industry, the appliance industry, the communications industry, world banking, or high tech — well, you get the idea.
We had a 60-year free pass. We didn’t have to be very good, and we still made a lot of money. Of course, in some niches we truly became world-class. But, in general, we simply fulfilled the needs and wants of the world, which was very profitable.
Over the past 50 years, anyone in Detroit willing to look could see the problems. Automobile plants were chaotic and inefficient, run by the collective greed of unions and management. Doing business right wasn’t anyone’s priority. Then, in the 1970s, around the time of the oil embargo, the Japanese started building cars with better quality and 20 percent less cost.
Just like the Detroit car companies, the rest of North America’s businesses were not driven to get good at “Revenue Generation.” It made more sense to expand the capacity to fulfill, because the more capacity you had, the more you would sell. Everything we could build, someone would buy. Sure, we lost a deal or two to a competitor down the street, but they lost some deals to us, too. Essentially, we both prospered — it was a friendly competition, and only the “worst of the worst” went out of business. In short, North America dominated the world of business.
In the ’70s, the oil embargo raised the flag that the world was ready to compete with North America in manufacturing. And now, our newer recession has raised a similar flag that today’s battle is for profitable revenue generation.
Today, much of the world can manufacture, most of the world uses the same software, and all of the world’s banks are a challenge and/or challenged. Winning today is a result of how well we go to market, how well we serve our customers, and how well we sell. In other words, winning is the result of how we apply the science of revenue generation to produce more profitable revenue.
The variable that determines success is the “Cost of Chaos,” and the level of our “Cost of Chaos” is the result of how well we practice the science of revenue generation. The Cost of Chaos is to revenue as Six Sigma is to manufacturing — so get it right or the other guy will.
More than 90 percent of B2B companies experience a “Cost of Chaos” between 15 and 25 percent of top-line revenue. If you’re a $20m company, your “Cost of Chaos” is plus or minus $4m dollars PER YEAR, which you just keep paying and paying and paying. The worst part is chaos is the anchor to hold down your top-line growth. When you remove the “Cost of Chaos,” your EBITDA goes up, your revenue anchor disappears, and your top-line is released to grow.
B2C companies are similar, but their “Cost of Chaos” is normally between five and 15 percent. B2C companies tend to sell commodities that are more price/cost sensitive, and their survival has always been tied to the ability to effectively compete for revenue. While their chaos is lower, an increase of just three or four percent in their EBITDA changes their world.
In the past, we were in a bubble. But that bubble has now burst. In the future, winning and profiting will be a result of successfully competing, and that requires predictable growth of profitable revenue.
In business, your offense is your ability to continually produce more profitable revenue. The science of “Revenue Generation” is your offensive game plan, and your defensive plan is the removal of the “Cost of Chaos.” This combination is the winning strategy that can give you a competitive advantage of up to 20 percent.
Now that the world has normalized and we all compete on a level playing field, winning requires you to continually create more profitable revenue. Here are four things you need to do to be one of the winners:
1. Accept that the world is in transition. You can’t go back, and the future is about new opportunities.
2. As far as the customer is concerned, you are on equal footing with businesses all over the world, and you need to develop an unfair advantage based on applying the science of “Revenue Generation.”
3. Start to learn and apply this science one step at a time just as you did Lean, Six Sigma and ISO. Removing the “Cost of Chaos” will directly fund your growth.
4. Don’t look back — the past is history! Release your new top-line to grow and then hang on.
Accomplishing these four factors will make you feel like you’re in a bubble, but in reality, you’re just winning The Revenue Game.
Rick McPartlin is the CEO of The Revenue Game and is a revenue generation consultant and Vistage speaker. McPartlin was a Vistage member development chair from 2002 to 2009.
Originally published: Sep 21, 2011