Putting intelligent insights to work: CFOs can use analytics to drive bottom-line growth

Contents
Introduction .....................................................................................................1 I. Context for change: Evolving analytics and the CFO ......................................2 II. Which customers are profitable? ..................................................................3 III. What are the more favorable prices to charge? ...........................................5 IV. Organizational implications .........................................................................6 V. Getting from here to there ..........................................................................8

Introduction
Most of the leading consumer product (CP) companies are using analytics about customers and pricing to help gain a competitive advantage in the marketplace. When armed with the capabilities and technologies to transform huge amounts of transactional data into actionable insights, a companys leadership can be confident in decision making to help improve not just the efficiency of day-to-day operations but also the effectiveness of strategic planning. Among CP executives, no one is better positioned than the CFO1 to answer these questions. First, the CFO can be an agent for change, the catalyst that typically brings together business unit leaders, the chief information officer and the Information Technology (IT) organization, and the functional executives accountable for performance in sales, marketing, and operations. Second, as a strategist, the CFO focuses on enhancing shareholder value. The use of innovative analytics is fast becoming one of the critical tools to help achieve this result. For these reasons, its the CFO who can implement and lead an integrated, profitability program: no one else has the access, reach, and influence to provide the enterprise-wide business intelligence needed to support and accelerate the decision making that can drive profitable revenue growth. But as an initial step, the CFO should know: Do we have the capabilities to deliver analysis-driven improvements? What data should be captured? Which analytical tools make sense for our business? Do we have the required people and organization in place? How big is the gap between what we need and what we have? In this point of view, we address these questions generally. For specifics, each CFO should examine his or her own organizations readiness for using analytics to help drive bottom-line growth.

Which customers are profitable? What are the most advantageous/most favorable/highly effective prices to charge?

CFO is meant to represent Finance leadership broadly and the CFO as the head of the Finance function

Putting intelligent insights to work CFOs can use analytics to drive bottom-line growth 1

I. Context for change: Evolving analytics and the CFO

The CFO can be ideally positioned to evangelize the use of profitability analysis within the CP company.
Analytics technology has grown increasingly sophisticated in recent years. In the 1990s and early 2000s, the push for enterprise applications (EA) to manage back-office operations helped to start the ball rolling, as certain companies gained the ability to capture and process large amounts of data. But EA typically fell short when it came to reporting and analyzing the collected data. The next wave of technologyenterprise data warehouse (EDW) and enterprise performance management (EPM) applicationsappeared in the mid-2000s and closed those gaps. EDW can provide the ability to store larger amounts of data for faster extraction, and EPM provides the front-end, business-friendly tools that can allow the business to own the reporting and analysis process. With the power of the new technologies, CP management became interested in using detailed and advanced analytics to help run the business more effectively. Now, analytics intend to allow the CP company to gain a deeper, more actionable understanding of customer and pricing profitability. Enter the CFO, the perfect choice The modern CFO wears many hats in the typical CP company (figure 1). As a steward, finance oversees the accounting, control, and asset preservation tasks which can be necessary for compliance with external financial reporting requirements. As an operator, finance seeks to balance cost and service levels in doing its job. As a catalyst, finance can be an agent for change and business alignment, using its central position to help identify, evaluate, and execute strategies and act as a business collaborator with other decision makers (including business unit leaders, the chief information officer, and sales and marketing executives). As a strategist, finance helps define the future of the company and focuses on enhancing shareholder value through a focus on profitable revenue growth, helping to manage operating margins and monitor business risks.
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Figure 1. The four faces of the CFO

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In these two last rolescatalyst and strategistthe CFO can be ideally positioned to evangelize the use of profitability analysis within the CP company. Heres why: Using analytics productively can require cross-functional collaboration among sales, marketing, and operations; so does producing monthly executive report books and financial statements. In other words, finance is already pulling these people together. Why not use the same network to help facilitate profitability analysis analytics to support key business decisions? While many parties contribute to the companys well being, finance has overall responsibility as the gatekeeper for the profit-and-loss statement (P&L) and is, for this reason, motivated to sponsor initiatives and activities that can help improve financial peformance. Finances ownership of the enterprise financial reporting systems can also give it an enterprise-wide platformthe infrastructure and processing power to import and analyze data from sales, marketing, and operations. Typically, the top two objectives of finance are 1) improving/ maintaining margins and 2) growing and preserving revenue. Business analytics can be fundamental to these mandates. The CFO is typically the natural leader in the quest to use analytics to help drive bottom-line growth. With an eye toward profitability and the external market, with a crossfunctional view of the business, with sensitivity to risk management, and with an appreciation of the value of factbased decision making, the CFO can be the most effective choice to help leverage technology and analysts in the pursuit of higher margins and greater revenue.

II. Which customers are profitable?

For driving bottom-line growth, nothing can be more fundamental than understanding customer segmentation. Analytics can help a CP company identify high-value customers and more effectively understand their behavior. It is widely known: it costs less to sell more to a loyal customer than to attract a new customer. When a product is a good fit for an already satisfied customer, a CP company can sell more volume, in these ways, help increase profitability per customer. The intense competition for high-value customers can underline the importance of using analytic tools to get closeand stay closeto the high-value customers. Also, advanced analytics can identify the dollars potentially being left on the table because of less-than-favorable pricing or agreements in place. In fact, research has shown that a company can gain an average margin uplift of 1-3 percent by implementing a pricing improvement initiative2a crucial differentiator and competitive edge during times of saturated markets, unfavorable macroeconomic conditions, and shrinking margins. Segmentation as the basis for customer profitability Improved profitability per customer should begin with a customer segmentation analysis, which can provide insights into customer preferences and subsequent purchasing behavior which drive overall sales, product mix, and margin contribution. Customers can be segmented in different clusters to create multi-dimensional views based on categories such as historic and predicted performance, strategic fit, buying behaviors, and cost-to-serve. The results can be surprising, as some of the largest volume customers can also cost the most to serve, while small volume customers might contribute much more margin. With an improved understanding of customer categories and the why of their buying patterns, the sales and finance functions can work together to manage the customer portfolio more effectively. By managing customer relationships proactively, Deloitte clients have typically increased their top-line growth, profitability and margin contributions, and future sales growth opportunities, while reducing general and administrative (G&A) costs. A multi-dimensional view of customer profitability Figure 2 illustrates customer segmentation based on profitability and customer longevity. Customers are grouped based on value that they may bring to the company and on how they can be managed to improve profitability. Strategic Accounts These customers tend to show steady purchasing habits over time. Because they appreciate and value the companys products, they tend to be its most valuable customers. The Strategic Accounts segment should be identified and supported from a marketing standpoint so the company can nurture and strengthen the customer relationship. In turn, the company could earn loyalty (in attitude and behavior) from this segment. The overall result could be: greater revenues and profitability per customer. Harvest Accounts These customers can be highly profitable, even though they do not show steady purchasing habits and buy for only a short time. Harvest Accounts usually enjoy deals and shop around, often keeping many sellers engaged at the same. A CP company should make the most of these customers and invest in them, as they could become Strategic Accounts eventually. But they can also turn into Fix or Exit Accounts or Improve Accounts; when this happens, the company should stop investing in these customers because theyre not committing to a long-term relationship. To appeal to Harvest Accounts, a company can align offerings with the buyers behaviors: Are there any other products that would complement current or recent purchases? Are the customers buying from competitors? Would volume-dependent pricing or a different product mix help grow the relationship?
Figure 2. Customer segmentation framework based on Profitability and Longevity
Harvest Accounts Strategic Accounts

High profitability

Low profitability

Fix or exit Accounts Short-term customers

Improve Accounts Long-term customers

Preslan, Laura, Price Management: Conventional Wisdom is Wrong, AMR Research Outlook, February 2, 2004; Kiewell and Roegner, The CFO Guide to Better Pricing, McKinsey on Finance, Autumn 2002. Putting intelligent insights to work CFOs can use analytics to drive bottom-line growth 3

Improve Accounts These customers tend to stay with the company for the long-term, but they usually take advantage of favorable conditions that are costly for the company, thus resulting in unprofitability. Improve Accounts typically do not generate profits because they buy during sales or because the size and volume of transactions are low. But if a CP company can manage these deficiencies, Improve Accounts can turn into profitable customers and even become Strategic Accounts. For example, if the problem is low volumes, cross-selling and up-selling techniques can extract more value (and ultimately more profit) from the transactions. For these customers, the cost to serve (sales force time, transportation, returns/refusals, and favorable payment terms) can drive high G&A costs. Fix or Exit Accounts These least profitable customers typically do not value the companys products and may not commit to steady relationships. Because of this poor profitability and loyalty, the company should address these customers as soon as possible, refrain from investing in them, and consider extracting the most profit from the transaction that the business has with them. The cost to serve should be closely looked at. The overall goal of segmentation is to move customers from a position of low profitability/short-term to high profitability/long-term (figure 3). To do this, people from multiple departmentsfinance, sales and marketing, and operationsshould work in cross-functional teams (see the chapter IV, Organizational Implications), each member bringing his or her own particular, data-based insights to the identification of customer profitability and longevity. Once customers are segmented, the company can strategically manage each cluster by allocating resources with the intent of turning customers into Strategic Accounts.

Case Study: Customer segmentation enhances customer retention and acquisition strategies Situation Over the course of last year, a major provider of personal jewelry insurance captured only 6% of the annual potential market. While its sales were growing at 20 percent annually, with 80 percent retention, the companys leadership had no clear profile of the customer base for marketing and promotional purposes. To grow the business, the company sought a more effective way to understand its customer base and develop strategies to retain and acquire customers. Action To improve the companys understanding of its customers, Deloitte helped identify potential new customer segments with a higher propensity to purchase personal jewelry policies. A cluster analysis on census and other demographic data defined primary customer groupings and segments, developed from a population of nearly 150,000 policies and 300,000 customers in the country. This segmentation allowed the company not only to identify high value segments, but also helped to perform a market penetration study by comparing existing and potential market share by segment. By knowing high value segments with potential for penetration, the team could create targeted marketing and promotional activities aimed at increasing market share and improving retention among current customers. Results The introduction of customer segmentation based on purchase propensity helped to provide the company with a unified view of its customer base, as well as insights on customer behavior, preferences, and lifestyles. This facilitated a marketing plan focused on new up-sell, cross-sell, and retention strategies. Ultimately, this led to not only increased product purchase loyalty and growth among critical customer segments, but also to the migration of core segments to higher profitability.

Figure 3. Customer segmentation goal

High profitability

High profitability

Low profitability Short-term customers Customer Long-term customers

Low profitability Short-term customers Long-term customers

Armed with an understanding of business strategy and at the crossroads of information, the CFO can be well positioned to drive customer segmentation and profitability related initiatives.

III. What are the more favorable prices to charge?

With the customer base segmented, the CFO can focus on specific segment growth and profitability. Equipped with the structure and supporting data, finance can produce decision-making quality informationinformation thats timely, relevant, and granular enough to help drive actionable initiatives. A picture is worth a thousand words The profitability waterfall (figure 4) is a tool that seeks to illustrate the effects of allocating expenses and managing customer, product, and contract profitability by category. Those who think that the P&L can provide the same insights should be aware: the P&L typically provides only an accounting view of profitability by line item or account number. A customer analysis solely based on the P&L would include costs not necessarily customer-specific (such as taxes and overhead). While directionally correct, in a thin margin environment, a P&L analysis could lead to decisions that can detrimentally affect overall profitability, while overlooking true customer contributions. The profitability waterfall presents costs that can be attributable to specific customer segments and customers, while breaking down pricing, cost of goods, operating expenses, and selling expenses to show the true profitability by expense category type. Each component of the profitability waterfall can be tied to specific processes and process owners. Armed with this information, a team between sales and finance departments led by the CFO could create meaningful financial results by building targeted, explicit tactical and strategic initiatives around any cost component. A customer profitability waterfall can often be eye-opening, as customers thought to be Strategic Accounts are shown to be Exit Accounts instead. For example, it might show that a customers high volume contributes to top-line growth, but sales may tend to pick up only during costly trade promotions. Similarly, the hidden cost of returns is often overlooked, and can hurt profitability; for example, if customers take advantage of volume discounts only to return unused product in the future. Equipped with this more granular data and insights through analytics, the CFO, working with sales and marketing, could reconsider the terms of the volume discounts offered to the customer or establish stringent rules for returns.

Figure 4. Price Waterfall

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By Ed Johnson, Mike Simonetto, Julie Meehan and Ranjit Singh, Deloitte How profitable are your customers really?, 2009

Putting intelligent insights to work CFOs can use analytics to drive bottom-line growth 5

IV. Organizational implications

As a strategist, the CFO can help decide where scarce financial resources should be used to support future growth. With analytics, other functions can contribute valuable information to that process. To leverage analytical capabilities effectively, the CP company should assess the organizational structure, beginning with cross-functional teams responsible for providing analytics support to the brands and business units. Recent trends suggest a movement toward cross-functional collaboration in CP companies. For example, some companies are putting their finance people onto account teams that can focus on customer value, relationship type, and performance (figure 5). By prioritizing the criteria most critical to the business, a company can use analytics to help decide how to most effectively allocate sales and marketing resources to specific clusters of customers. This in turn can increase profits by helping to reduce costs incurred and increasing collaboration with critical Strategic Accounts. Two structures have been shown to support cross-functional analytics: embedded analytics groups and a center of excellence (COE). Embedded analytics groups Specialized analytics groups embedded within most business unit/brand usually interact with sales, marketing, and finance, while performing the lions share of analysis. Embedded analytics groups are required to understand the competitive environment of the brand/business and to work closely with executives to formulate the required analyses to support their decision making. The embedded analytics group frequently shows up on the organization chart as an extended Financial Planning and Analysis unit. At one manufacturer, an embedded group developed models to provide detailed SKU-level profitability to support sales, marketing, supply chain, and operations.3 Centers of excellence Given the current environment, most companies are looking to reduce headcount and costs across the functions. Finance has typically led the way by migrating transactional operations to a shared service organization or a business process outsourcer. Now, new opportunities should be explored, among them a centralized environment known as a center of excellence (COE), which has been demonstrated by Deloitte research to help drive significant cost savings and other benefits.

Figure 5. Marketplace trends CP manufacturers are evolving the sales organization to more effectively deliver value to customers

From Account team focus Account team composition Customer value proposition Customer relationship Performance mgmt focus Sales execution Primarily sales Brands, products & relationships Traditional buyer seller Top line results

To General management Sales led with cross-functional support Insights, investments, services, brands, products & relationships Expert-to-expert interfaces Balanced top and bottom line performance

By prioritizing the criteria most critical to the business, a company can use analytics to help decide how to most effectively allocate sales and marketing resources to specific clusters of customers.
4

Miles Ewing and Ajit Kambil, Deloitte Advanced Business Analytics: Should CFOs and Finance Lead the Charge?, 2011

The resources in a COEhighly skilled in technology, reporting, and financial systemssupport embedded analytics groups by formulating queries and synthesizing crossfunctional data according to specific parameters. Because of the volume of requests across the brands/business units, the COE can be much more efficient and effective at creating ad hoc analytics, while providing a consistent set of metrics across the businesses. A CP company, with more than $10B in revenues and market brand presence of #1 and #2 in fifty countries, was looking to achieve savings by migrating certain transactional and knowledge-based finance activities, including financial

planning and analysis (FP&A), to a centralized environment. The CFO believed there was an opportunity to improve the finance functions cost profile, while increasing the value add delivered to business partners. A detailed global business case was developed to assess the financial benefits of a center of excellence. In implementing the COE, the company simplified its infrastructure, improved decision support and analytics, and increased information integrity. Finance was able to provide more value to critical stakeholders and business partners through the help of datafacilitated decision making, while economies of scale and process efficiencies helped to reduce costs.

Case Study: Implementation of a customer profitability program across three areas to improve value Situation With an increasing pressure on margins and stagnating revenues, a $5B consumer products company refined its go-to-market strategy with the objective of improving both revenue and profitability. Led by the finance function, this transformation centered on a commitment to help the company gain profitability that spanned the entire organization. Actions Grounded on a strategic use of business analytics, customer profitability has been impacting the companys processes in three dimensions: decision making, role of the sales force, and customer investment strategy. First, the company had used a traditional, top-down planning approach based on experience, in which decisions were mainly driven by rules of thumb guidelines in response to customer requests, resulting in a strong focus on short-term benefits. Now, with the introduction of customer profitability, the companys focus has been switched to long-term profit and growth. Decisions are being made by finding the appropriate balance between top-down and bottom-up planning, and they have been backed up by customer level insights that can be shared proactively with customers. Second, the sales force had been heavily focused on top-line growth, driven by basic management of trade budgets with significant hold back and a perspective that seemingly ignored the effects of decisions on other, non-customer-facing functions (such as finance and logistics). Now, customer profitability can transform the sales force from account management to business management, with responsibilities and goals on both the top and the bottom lines of the business. This has given frontline people the opportunity to manage a full-year plan with increased trade investment, help drive growth targets, and coordinate cross-functional teams facilitating expert-to-expert customer relationships. Third, the company used to segment its customers by revenues; as a result, customer size and near-term sales had dictated go-to-market priorities. The introduction of customer profitability is allowing the company to pursue investment strategies based on customer performance rather than just revenue; the new priority is customers who improve shareholder value. Results The introduction of customer profitability has changed the companys culture on many fronts, while initiating a series of initiatives that have increased earnings before income taxes by more than three percent. Net sales are up; less investment was required in discounting and trade promotions. These results were made possible by eliminating underperforming discounts in small/emerging sales channels, by controlling non-performing investments across large customers, and by eliminating abusive returns and refusals practices. Other savings have come from a reduced cost of goods sold and a more effective mix of products to reflect the needs of performing customers versus non-performing ones.

Putting intelligent insights to work CFOs can use analytics to drive bottom-line growth 7

V. Getting from here to there

Implementing analytics should not be a big bang initiative; capabilities that can meet the companys needs should be developed over time. A crawl-walk-run approach can allow the CFO to focus on one step at a time. First, ask questions Before taking any action, CFOs should ask, What capabilities are required to deliver these analytic-driven improvements? Data quality plays a crucial role, and the CFO should confirm that the organizations technology can provide the ability to pull and integrate data from multiple, disparate systems. In other words, the data sets should have the required integrity. The next question is Are we capturing and analyzing the proper data, the proper way? The analytical process should be appropriate and defined. One way to determine whether this is the case is by using multiple analytic tools to triangulate to an answer when addressing an issue. The final question is about resources: Do we have the required people and organization in place? Functional decision making can require strong executive sponsors who can drive cooperation and build consensus across crossfunctional stakeholder groups with conflicting interests. The CFO should involve resources who are experienced not only in the analytic techniques, but also in the business. The process (and results) will likely challenge conventional wisdom; the CFO should recognize that possibility in advance. Second, determine customers needs By working collaboratively with marketing and sales to determine customers needs, the CFO can gain insights about the nature of the business and demands of the marketplace. Then, in defining customer segments, the cross-functional team(s) can align each segments features with the companys strategic goals. The CFOs subsequent go-to-market recommendations for profitable revenue growth should reflect the segment performance analysis. Third, define the go-to-market initiatives The CFO should use business analytics to quantify the potential impact on revenue and profitability of each go-tomarket initiative, as well as to determine the feasibility of each in terms of ease and pace of implementation. The initiatives should target business opportunities identified by the customer segmentation analysis. The CFO should prioritize the initiatives by value, focusing on the realization of tangible benefits early on as the most effective way to get buy-in to the use of business analytics from finances business colleagues. Prioritization can include the design of an implementation roadmap that would specify owners and their responsibilities. Fourth, build in-house capabilities Improving the value of investments in advanced analytics requires appropriate knowledge transfer to build strong in-house capabilities. Customer segmentation and profitability programs should be flexible to meet unexpected changes in the business and in its priorities. The CFO should plan for frequent executive interactions that would allow for go/no-go decision points during each step of the program, based on prior success and delivered value. Fifth, measure results and improve continuously Even though technology is important, value should come first. Value can be delivered through operational and decision-making improvements, in addition to the technology platforms used. The use of business analytics can allow the CFO to support and accelerate functional decision making related to profitable revenue growth.

The time is now for finance leaders to help influence, and in some cases to outright own, the business analytics agenda to help drive top and bottom-line growth.

Authors
For more information: Tom Bendert Principal Finance Practice Leader, Consumer Products Deloitte Consulting LLP +1 212 618 4222 tbendert@deloitte.com Adrian Tay Senior Manager Deloitte Consulting LLP +1 213 688 3212 adtay@deloitte.com Michelle Leigh Porter Manager Deloitte Consulting LLP +1 212 313 2693 michporter@deloitte.com Francesco Orselli Senior Consultant Deloitte Consulting LLP +1 212 313 5084 frorselli@deloitte.com Iwona Tarnowska Senior Consultant Deloitte Consulting LLP +1 312 486 5543 itarnowska@deloitte.com

Visit Deloitte.com To learn more about our Consumer Products Industry practice and our capabilities within the area of planning, budgeting, and forecasting (PBF), visit us online at www.deloitte.com/us/consumerproducts.

Putting intelligent insights to work CFOs can use analytics to drive bottom-line growth 9

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