In order to consult with customer operating managers on how they can improve their contribution to profits from an investment they make with you—in something you may call your "solution"—you must counsel with them in their own terms. These are not the vendor's terms of product features and benefits or price and performance. They are, instead, the basic language of business management in its most elementary form: Business Management 101.
At the customer manager level, "business-ese" is the only language spoken. It is transaction talk, the language of money being transacted. It is charged with action verbs: funds being invested, investments being returned, cash flowing, payback occurring, profits improving, costs being reduced, revenues being increased, and market share being gained. But these are simply ways of expressing what is happening to the subjects of these verbs, the dollars themselves. Customer manager talk is money talk.
What do you have to know in order to "talk money" well enough to be conversant in "business-ese?" There are two requirements: to know how money is classified and to know a customer's current money base of costs and revenues and how much you can affect them.
Money is classified into six major categories:
Investment—what customers pay out.
Return—what they get back on what they pay out. The rate of return is the ratio of return to the investment.
Payback—when they get their investment back.
Net profit—what they make on their investment or their increment over and above payback.
Cost—an investment on which there is no return.
Opportunity cost—the profit they could have made on a different investment.
Consultants ask for incremental investments, money that is over and above the basic fixed-cost investments in the business as a whole. In return, they propose incremental profits. Incremental investments are discretionary. Customers choose among them on the basis of the best combination of muchness, soonness, and sureness that meets their needs.
Most consultative sellers propose incremental profit improvement. The rate of return is calculated only on the incremental investment in the proposal, which tends to make it exceedingly high. The customer's total investment in the business as a whole, or its total corporate return, is irrelevant. Consultative Selling takes place in the arena of a customer's microeconomics.
For that reason, the customer's balance sheet and income statement are neither causes nor effects of Consultative Selling. They will rarely, if ever, suggest leads. Equally rarely will they be impacted by a consultative seller's incremental improvement of any one business manager's contribution to profits. Yet, for the individual business manager whose profits are improved, the consultant's contribution can be a matter of life or death.
The consultant's micro impact makes a customer's annual report and 10-K interesting background reading but generally unproductive in targeting leads for Profit Improvement Proposals.
While it is true that all improved contributions to corporate profits flow to the corporate bottom line, they cannot be found there in annual or quarterly reports. In businesses of medium size on up, incremental profit improvements are subsumed in total profits. This makes annual or quarterly reports worthless as score-cards. For the same reason, they are also worth very little as lead targeters. Even when individual lines of business are broken out separately, the breakouts are almost always too large to be able to identify operation-specific cost problems or revenue opportunities for PIPping.
As background for operation-specific lead targeting, only the income statement offers anything of value. It shows whether profits are going up or down. The president's letter tells you the official reasons why. It may also indicate corporate priorities into which you can tie a PIP's business fit.
The income statement also lets you learn if total earnings are growing by giving you the information to calculate profit margins. If you divide annual net income by annual sales for the past three years, you can see if margins are shrinking even if sales volume has been rising. This tells you that business is being bought rather than sold and that your profit improvement projects must be structured to help restore income.
If you divide the cost of goods sold by total sales, you may see additional evidence that profit improvement is needed if cost as a percent of sales has been rising over the past three years.
The ability to interpret an annual or quarterly report's data, more so than the data itself, is a key resource. When a customer announces an earnings gain of 15 percent, it is easy to see it as a growth company. But if you compare the rate of earnings growth to revenue growth, you may see that earnings are growing faster than revenues. If so, earnings are coming from cost management, especially cost-of-sales management, and not from sales. The challenge to grow the top line, which is the key performance indicator of a growth company, is going unmet.
If you want to predict how likely it is that top-line growth will increase in the short term, you can try to estimate the short-term growth potential of current sources of revenue. In the case of Hewlett-Packard, most of its growth revenues are from low-margin products like personal computers and printers that are subject to continuing price erosion. If H-P's market continues to shift to lower-priced models, both revenues and earnings growth will come under increasing pressure.
The data you need to qualify and quantify a customer's consultative needs cannot be found in reports. It is business-line-specific and business-function-specific and consists of two categories of data:
In a profit-centered line of business, what contributions to its revenues and earnings being made by its critical products and services can you affect? What is the gap between the current contribution of a product or service and the line managers' objective to increase it? Can you help them close the gap enough to make you a compelling partner?
In a cost-centered business function, what are the current contributions to the function's costs being made by its critical factors that you can affect? What is the gap between the current contribution of a factor and the function managers' objective to reduce it? Can you help them close the gap enough to make you a compelling partner?
When you know the answers to these questions, you will be ready for your first conversation in "business-ese" with a customer manager. Your objective will be to reposition both of you: your customer into a client and yourself into a consultant.