Agreement Profitability in Action
Last week, we posted a deep dive into Agreement Profitability and the dependencies impacting it that are not generally considered when calculating. What we did not tell you in that post is what to do about it and how to track it effectively without hiring a team of dedicated resources! The 3 dependent factors associated with Agreement Profitability tracking were effective rate, product bundling, and disparity in value.
Here is an example of how we use effective rate to better understand Agreement Profitability. One of our high profile clients is a nationwide restaurant chain that we provide managed firewalls for each location to. As we worked together, we couldn’t shake the sneaking suspicion that the relationship was not profitable – despite what our basic metrics told us. So, we began a deeper dive that lead to the realization that our senior engineers had ‘dibs’ on servicing this client. If an issue came up, our most expensive engineers would dispatch onsite, perform a minor service, and accept a gracious offer to a world-class steak lunch. While our most highly compensated resources provided exceptional service, interns could have easily performed it just as well! It can certainly be argued that the senior engineers could perform the work much faster, it wasn’t nearly fast enough. When I looked at Effective Rate, it hid the true cost of these engineers working the tickets!
One more example related to the importance of true profitability. Back in 2006/7, we were looking for ways to incentivize our engineers based on the profitability of contracts. During this time, we continually faced the realization that engineers are not finance people and would often draw incorrect conclusions when it came to profitability. This issue was especially exacerbated on contracts that included hosting or other significant hard costs. We tried to focus them initially on LLGM%, but their eyes glazed over! We had to find a better way to communicate the true profitability of contracts and properly incentivize them. It was through this dilemma that we created a customer efficiency score or CES. We knew that our target of LLGM% was 70% in a perfect world. So, we defined 70% LLGM as a customer efficiency score of 100%. We created a CES gadget in ConnectSMART and selected seven BETA customers to monitor during the initial quarter. We presented the CES model to our engineers and discussed how increased efficiency at each of these customers would raise the average score. We gave $50 to each engineer for every half of a percentage point the average CES increased. The result – we raised our CES over 5 percent during the first quarter. We gladly paid each eligible engineer an additional $540 ($3,300 total) and realized a return of $11,200. Best of all, those same efficiencies are still in place six years later!
Understanding how to properly account for agreement profitability is step one, having the ability to quickly and easily visualize that data in real time ensures you maximize profitability and align your teams to company and customer success each day.
Want more? Please join us and (customer name) for a 30-minute hang out on x/x/2014 to learn how they use ConnectSMART to gauge and grade their business in real time every day. Reserve your spot now!