Tag: bottom line
By Kevin Trokey
I hear various broker conversations that include a similar complaint: prospects don’t seem to truly appreciate the value of the value-added services being offered. And, even when they do, they don’t use them after they become a client. There are many reasons for this, but I’m going to focus on a few within your control.
I’m assuming many of the value-added solutions you offer prospects are intended to help improve internal communications: You set up websites, deliver valuable content, discuss year-round communication strategy, provide communication resources to improve performance management and maybe you even suggest ways to improve communication with their clients.
I’m also assuming you can empathize with these conversations, and you have prospects to whom you present your solutions—prospects who would clearly benefit from having them, but never hire you to get the job done. I’m just as certain that some of your prospects-turned-clients never use the solution as either of you intended. That lack of use almost always happens for two reasons:
- Lack of motivation by the client or prospect to do the hard work of implementing the new solution, process or procedure that you are offering. This is largely because you lead with a solution rather than with a conversation as to why the prospect may need the solution.
- We, as brokers, leave them only to consider the price of our solution—or worse, leave them thinking it is “free” and, by reasoning, has no inherent value—rather than putting them in position to weigh that price against the cost of their current action (or inaction, as it were).
Leading with a client-focused conversation is a topic for another article; for now, we’ll examine some ways to quantify the high “cost of doing nothing.”
Determining the cost of doing nothing for corporate communications
To illustrate, let’s evaluate the costs for hypothetical ABC Co., based on the following information. If your prospect can identify this information for their own company, you can help them quantify their financial impact of poor communication:
- 50 employees
- Average salary = $41,674 (avg. annual U.S. wage according to ssa.gov)
- Revenue/ee = $100,000 (avg. revenue for small business)
- Profit margin = 10% (according to smallbiztrends.com)
We’re going to evaluate the organizational impact of poor communication in the following four key areas:
1. Organizational vision
Employers need to be communicating to their employees about where they are now as a company, where they are going, the steps they need to take to move from the former to the latter, and how they are performing as an organization at any point in time. Those who don’t are disconnecting themselves from their employees and exposing themselves to the high cost of employee disengagement.
According to a recent Gallup study, the cost of disengagement is represented by the term “payroll efficiency factor.” In an average company, this runs 63% (leaving an inefficiency factor of 37%). That means for every $100,000 spent on payroll, there is only $63,000 worth of work being performed. Let’s calculate for ABC Co.:
- Annual Payroll = $2,083,700 (average salary x number of employees)
- Engagement inefficiencies = $770,969 (Payroll x inefficiency factor)
- Let’s assume that only 1/3 of that inefficiency could be attributed to this area, we still have a negative financial impact of $256,989
2. Individual performance
Let’s be honest, almost nobody enjoys performance reviews—mostly because few managers have been properly trained on how to do them effectively. Many elements contribute to effective performance management, but ongoing communication between managers and direct reports is key.
A study by the Hacket Group cites companies who excel in this area show a 22% improvement in net profit margin. For ABC Co., that translates to:
- Annual Revenue = $500,000 ($100,000 rev/ee x 50 ees)
- Profit Margin = 10%
- Net Profit = $500,000
- Increased profit due to improved communication in this area = $110,000 ($500,000 x 22%)
3. Customer communication
We talk often about the importance of employee engagement, but almost as important is customer engagement. The key to customer engagement is twofold. First, engaged employees will result in engaged customers. Second, we have to ensure that we are communicating the right message in the right way to customers. When we do so (according to Harvard Business Review), the results are also twofold: engaged customers will spend 23% more with us, and the dollars that they spend will also be 23% more profitable.
Again, let’s see what that translates to for ABC Co.
- Current annual revenue = $5,000,000
- Engaged annual revenue = $6,150,000 ($5,000,000 x 23% increase)
- Engaged profit margin = 12.3% (10% x 23% increase)
- Engaged net profit = $756,450 ($6,150,000 x 12.3%)
- Improvement in net profit = $256,450 ($756,450 – previous profit of $500,000)
4. Benefit program
We all know that employers want their employees to place the highest value possible on the benefits provided, and effectively communicating that is the key to maximizing that value. What we may not all know is the quantified cost of that value: According to the McKinsey Quarterly study, effectively communicating a benefits program can reduce costs by as much as 20%. For ABC Co., that translates to:
- Annual benefit spend = $729,295 ($2,083,700 payroll x 35%)
- Potential benefit program savings = $145,859 ($729,295 benefit spend x 20%)
Totaling the cost of not communicating effectively
Organizational vision $256,989
Individual performance $110,000
Customer communication $256,450
Benefits program $145,859
Those are significant numbers! They are so significant, you may struggle buying into them. Let’s assume that they are overstated a bit—or, overstated by a lot. Even if the potential cost impact is only 20% of that total, the “cost of doing nothing” for ABC Co. is still $153,859.
I don’t know about you, but I think $153,859 is a significant amount, especially in a company with $500,000 of net operating profit. When it comes to financials, you can either impact the bottom line (what we have identified here) or you can impact top-line revenue. For ABC Co., whose profit margin is 10%, the alternative would be to produce $1,538,590 in top-line revenue. It’s pretty safe to say that that would make you the best salesperson in the company.
So, there are four areas where we all know that communication is critical and likely four areas where you have been offering solutions that don’t pique the interest of prospects or get used by clients. Perhaps if you helped them see the high cost of their current practices, those prospects would find the urgency to work with you, and perhaps your client would find the continued motivation to use what you have put in place.
As I said at the beginning, understanding this high cost is the first step. The second is putting together an implementation plan—and taking the responsibility for its execution—that will ensure your solution is used, and used as intended.
If your solutions aren’t causing prospects to buy and aren’t being used by your clients that do buy, don’t blame the solution. The likely problem is that the known “cost of doing nothing” and “plan for implementation” are missing from the picture.
It’s a picture you are capable of completing, you just have to ask yourself, “How badly do I want to?”
About the Author
Kevin Trokey is President of Benefits Growth Network, a firm specializing in growth strategies for Employee Benefit agencies, departments and producers. He can be reached at firstname.lastname@example.org.