The importance of intangibles

YOU WANT the good news? Robert Nadeau says an incredibly efficient accounting system has for over 100 years been telling companies how proficiently they have been managing the tangible side of their business.

And now the bad news: He says most of a company's competitive advantage — “the ability to outperform your competitors” — comes from intangible assets, which most companies don't understand.

“Tangible assets have the same value no matter who owns them,” said Nadeau, managing principal of The Industrial Performance Group, in his presentation, “Developing Working Relationships for Competitive Advantage.”

“You can switch with your competitors and nothing different is going to happen. It's the people who utilize the tangible assets who make the difference. And one of the key ingredients is the relationship between a manufacturer and its distributors to serve the mutual customer.

“The tangible side of your business appears on things like the balance sheet and income statement. We have to start looking at the intangibles: people, relationships, information, capabilities. It can account for up to 70% of a business' market value. The bean counters are going to lump that into ‘brand’ or ‘unique customer experience.’ The bad news is that the standard accounting system does not track the value of people, information, or capabilities.

“The standard approach to accounting puts people in the category of ‘cost.’ As opposed to saying, ‘This is one of our primary wealth mechanisms — what are we going to do with it?’ it's usually a case of, ‘We've got to reduce the head count.’ The intangible assets are the primary driver of wealth creation in North America because most manufacturing is moving to China. The Chinese haven't figured out how to sell and market products into the marketplace here. But they're working on it.”

NTEA survey

He said that 10 years ago, the National Truck Equipment Association (NTEA) participated in a survey conducted by The Industrial Performance Group to benchmark the manufacturer/distributor working relationship.

The survey findings based on the responses of 750 manufacturers and 500 distributors indicated that 67% of the working relationships lacked common goals, did not have plans, had roles and responsibilities that were not defined, and poor communication.

“It's a situation that's rife with uncertainty,” he said. “When there's ambiguity in a working relationship, you're going to see a higher occurrence of problems and mistakes. If you don't know what's expected of you, and the other person doesn't, you're going to act in your self-interest. You're going to do what's best for you. The customer's out there going, ‘Hello, did you forget about me? I'm here twisting in the wind.’ ”

He said that when there is a problem in any system, it is subject to the “Bullwhip Effect,” in which the problems and mistakes intensify as they move toward the customers — shifting the burden.

“A little hiccup upstream grows in amplitude as it moves closer to the customer, and the thing turns into a tsunami,” he said. “You're running out of time to react and respond, and rarely if ever does someone up the channel call someone closest to the customer and say, ‘We're not going to make that shipment.’ The customer is the first one to typically realize someone has dropped the ball.”

The survey showed that 82% of manufacturers and 92% of distributors said problems in their working relationships were having a negative impact on their business.

“We wondered, ‘Were there any really bizarre, rarely occurring problems in the area of Six Sigma? Or were they day-to-day things that shouldn't be happening?’ ” he said. “Both the manufacturers and distributors said those things were having an impact. They couldn't give us specific dollar amounts. They said, ‘We know they're occurring and we think it's driving our sales and marketing costs up, and we're losing sales volume.’

“When I would present these findings from our survey to managers in seminars, most of them would say, ‘This is a great presentation, but we're not going to do anything different. It's interesting, but not relevant.’ I couldn't figure out why that would be. It had to be that things were so good in their industry that it didn't matter, or they were totally unaware of the true cost. I had a sneaking suspicion that it was the latter. Your measurement system doesn't deal with true costs associated with problems and mistakes.”

Unnecessary costs

The next survey, which went on for a year, involved over 1000 companies, including 200 NTEA members.

It found that the common drivers of unnecessary channel costs were:

  • Fixing mistakes

    “A mistake is defined as any time the right product doesn't get to the right place with the right paperwork at the right time.”

  • Expediting orders/fast tracking

    “Which is, ‘Oh, my God, put that thing on an airplane at $100 a pound. Spare no expense. We must deliver.’”

  • Excess inventory

    “How can you be doing those things and still hanging onto things people aren't ever going to buy? It's related to a lack of demand forecasting. Inventory is a huge cost.”

  • Waiting

    “The mutual customer is not happy because you're dropping the ball. You're probably thinking, ‘Well, we're going to fix our screw-up faster than the other guy.’ But that's not the value proposition you want to put on your business card.”

Once again, most of the companies felt there was no need to change anything. He said they were looking at their balance sheet and saying, “There's no line item for the cost of problems and mistakes. So guess what? It's not a problem. It doesn't exist.”

Nadeau said his company had to find a different way to measure it.

He said the problems have the greatest measurable impact on the customer. And who is going to do everything humanly possibly to keep that from happening? The sales person, “the last bastion of defense.”

According to a national survey of 1,502 companies done from July 2005 to November 2006, sales people spend less than half their time selling and a “tremendous amount of time throwing their bodies in front of the tsunami,” Nadeau said. “You can call it customer service or whatever, but I tell you it's ineffective utilization of one of your primary intangible assets.”

The survey showed that 5% of sales people are peak performers and 5% are “what we refer to as in-laws and relatives. You can't fire them. They aren't very good. But they're there.”

He said that 64% of the average performers were engaged in relationships that have moderate to high uncertainty. They spend 38% of their time generating revenue, but only 14% is spent in prospecting and conducting needs analysis. More telling, they spend 23% of their time on problems and mistakes.

That's 11 weeks per year, per sales person.

“It's one week short of a financial period,” Nadeau said. “It's like saying, ‘Let's just forget about making money for one quarter in a year.’ A lot of people justify it by saying, ‘Well, that's how we add value to customers.’ Which is like saying, ‘We'll come over to your house and start your porch on fire. But we'll put it out faster than anybody else.’ That is not how you add value for the customer.”

He said the common problems consist of quotes, Pos, and invoices that don't reconcile, and delivery problems, such as: early, late, or missed deliveries without notification; short-ships; picking errors; shipments and paperwork that don't match; and damaged goods.

“Delivery problems do occur, but they aren't the big showstoppers,” he said. “The big showstoppers are the normal, little day-to-day things.”

A survey of the truck equipment industry showed that sales people are spending 39% generating revenue, 39% in operation and management, and 22% in questionable utilization.

“Your sales people on average still spend 10.5 weeks per year in an activity that you can make go away,” he said. “It creates no value for the customer. It's basically pure waste.”

He said his company's clients “are getting huge returns on their investment” when they take action to curb the waste.

“Could you gain a competitive advantage if each of your sales people spent an additional 10.5 weeks each year prospecting and conducting customer needs analysis?” he asked. “What would your balance sheet look like if each of your sales people had an additional 10.5 weeks every year to sell? Most people are using a sales person, who has the ability to generate $850 to $2500 an hour, to deal with problems you could resolve with an $18-to-$25-an-hour person. You are using one of your most valuable assets on defense.”

He said his company experienced “the Mother Lode” with a client that is a Fortune 500 company in the pharmaceutical industry.

“They realized that as the company got larger, there was a tremendous number of people who want access to information outside,” he said. “All these people were sending e-mails and text messages to the sales reps. They were getting a tremendous amount of e-mail, but because it was coming from the ‘Mother Ship’, it must be important. They felt they needed to pay attention to it. But a lot of times, the e-mails were, ‘Here's what the execs are having for lunch,’ or, ‘We just changed the toner cartridge in the corporate copy center.’

“They realized they could reduce that by two hours a week if all of the inbound messages went through a gatekeeper who said, ‘Someone else can answer that question. Don't send it to the sales reps.’ Two hours doesn't sound like much. But they have 225 reps. Assume they work an average 50-week work year. They freed up 22,500 hours of sales time. It's the equivalent of getting 10 more sales people for no cost.”

And that, he surmises, is something even the bean counters can appreciate.

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