Walk away from unprofitable customers
Any CEO who says it’s easy to walk away from revenue has never
done it. There’s both security and cachet for companies that attain
high levels of market share and Mad Catz previously aspired to reach
the top position. But for a company with $100 million in annual revenue in a cyclical niche industry, the line between profit and loss at
its current margin was precariously thin.
“When you looked at our numbers from a high level, overall for
each product and customer, everything looked OK,” Richardson
says. “But there can be hidden costs associated with selling to
large retailers, so you have to look at the detail. You have to consider the freight and logistics costs, and with some accounts, the
cash-to-cash cycle can be lengthy, and then you also have to consider the company’s overhead in servicing the account. In addition, we often had the company’s operating capital tied up in unprofitable products, which precluded us from expanding beyond the
cyclical hardware marketplace. After looking at the numbers in
great detail, I presented my idea to the management team, which
was basically that we make every product profitable. It came as a bit
of a surprise to everyone because it was the opposite of anything
we’d ever done before.”
Richardson began taking steps to make each product and each
retail placement profitable, knowing that if his ideas failed, he
would stop manufacturing the product. His team approached each
customer and presented ways to make the relationship more of a
win-win situation.
“We didn’t leave anyone high and dry,” Richardson says. “But we
did collaborate with each customer about improving our profitability. In some cases, we were able to start using our customer’s
supply chain instead of ours because they were open to the idea.
Leveraging their system affords us better logistics pricing, and secondly, you have to look at where you bring value. We don’t bring
any value in terms of logistics — it just adds to our operating
costs.”
While the margin improvement plan was successful, some
products were eliminated. The subsequent reduction in revenue caused Richardson to reduce the company’s head count
by 20 percent to 165 employees.
He says he favors sharing the pain across the company when
forced to make staff reductions, and while Mad Catz initiated
most of the terminations, not everyone embraced the change
in strategic direction, and some people left of their own
accord, giving Richardson a little less control over the outcome.
“It was tough for some people because I really think they thought
it was the wrong thing to do,” Richardson says. “I was surprised
when a couple of people left. In retrospect, I wish I would have
fought a little harder to keep some really good people who didn’t
stay. It was especially hard on our salespeople because they had to
fight for the business initially, and then they had to go back and try
to make it profitable.
“During times of change, you really have to spend time talking
with a lot of people, and you do a lot of traveling. The toughest part
of repositioning the company was the downsizing and convincing
everybody that this was the correct strategy, and of course, the
investment community always takes a wait-and-see attitude.”
The positives from the downsizing not only included a reduction
in overhead, Richardson says it made the company more nimble
and ready for the next phase, which included adding back more
profitable growth. In addition, he says that he’s made one more
permanent adjustment from his business analysis experience: He
now requires the sales staff to complete a thorough profitability
analysis before he agrees to a new customer relationship.