Adrian Slywotzky on profiting out of problems

By: Paulami Kar, WG'03

Posted: 11/4/02

The most recent Wharton Leadership Lecture, held on October 28th , featured Adrian Slywotzky, Vice President and Board Member of Mercer Management Consulting. Mr. Slywotzky is the author of The Art of Profitability (2002), Value Migration: How to Think Several Moves Ahead of the Competition, and co-author of the bestseller The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits, which was nominated as one of the Top 10 Business Books of 1998 by Business Week. The Wharton Journal caught up with the consulting guru to get rare insights into the turbulent world of business.

WJ: Thank you for coming to Wharton and speaking to us. We understand that the main topic of your speech today is "The Art of Profitability."

AS: Yes.

WJ: How has the art of making profits been impacted by the current recession, given that it is quite unique in its genesis?

AS: First of all, profitability has always been important but a lot of people forgot that in the late nineties. The current economic environment, which, as you say, is quite unique, actually hikes the importance of profitability. Profitability isn't what it used to be. There used to be one predominant profit model – have the highest market share. Business model innovation in the last decade and half has caused there to be two dozen ways in which profits can happen. So, (a) it is much more important and (b) it is much more complex, or to put it differently, there are many different ways in which organizations can create profitability, and this is a very good time to learn that.

WJ: What is your opinion on the business model of the New Economy? Would you completely discount it or do you think there are still some merits to it?

AS: To start with, I would say that 95% of the companies had no business model. A business model is the answer to a few questions. What is my unique value proposition? Who are my customers? How do I make money? What is my strategic control and how do I protect it? These companies didn't have any answers to those questions. There was a smaller group that was actually quite good but there was simply not enough financing or cash for their incredibly high customer acquisition costs. And the third, the tiniest percentage, defined by eBay and Yahoo!, are the ones that were able to answer those questions. It was a much smaller harvest than people had hoped for, but this was certainly not unprecedented. If you remember the glory days of PC software, there were hundreds of PC software companies with 90% gross margins and 40% growth. The only two I remember surviving the nineties are called Microsoft and Lotus, now part of IBM. This is not a new phenomenon – we had it ten years ago – but this is much larger in scale.

WJ: For those of us interested in consulting, how would you describe the profit model of the consulting business?

AS: I think there are several different models at work in consulting, depending on the firm. Clearly, there are a couple of firms whose profit model is brand, who get price premiums because of the brand name and who are potentially currently vulnerable because structural changes have discounted the value of the brand. If you look at the last ten years, there were firms that had the brand model and the price premium associated with it. There are several other models, one of which is intellectual capital innovation and therefore, a variation of the time profit model. You have to come up with a new idea and use it before it gets copied – and it will get copied very quickly. And the third model is the customer solution or customer relationship model where people spend years in developing a client relationship and, if they do good work, they can literally partner with the client for a period of many years. I think there will be new models developed over the next couple of years and of course, there will be – there has already been, and will continue to be – a significant contraction in the size of the industry.

WJ: Has there been a significant impact of the recession on the models in the consulting industry?

AS: The greatest impact has been on 'brand', the lowest impact has been on the customer relationship model. The time-profit or the intellectual capital innovation model I would place somewhere in between. But brand was the hardest hit.

WJ: Shifting focus to your latest book, I found it very interesting that you used the mentor-protégé setting to talk about profit models instead of the usual business book format. Where did you draw the inspiration to structure your thoughts in this unusual format?

AS: It wasn't inspiration at all. It was compulsion. Many clients and many readers of The Profit Zone said that the message is exactly right and it is important to teach people to think beyond the market share model. But many clients said "I can't get an entire organization to read a business book, but I have to make all the people in my company understand how profit happens". So the challenge was to communicate these ideas and their further development not through a business book which is empirically based, with lots of data and tables, but through something which is accessible to everybody in my company. And the result was to communicate the ideas through a story. There are two other differences. One is that in a business book, you are given the answers. But in the The Art of Profitability, you are encouraged to develop a style of thinking that allows you to create an answer for yourself. And number three, unlike a standard business book which focuses on a certain topic and stays there, The Art of Profitability tries to get students and managers to develop a habit of reading beyond what they are required to read, because business is becoming more of a discipline, more of a science. It is not all just common sense. There are things you have to know, and one of the objectives of The Art of Profitability is to try to help people build that experience base more quickly.

WJ: In your experience, what are the major stumbling blocks that organizations face in the process of continual learning?

AS: There are a couple of major blocks. The first is mindset, which this book tries to address or reinforce. But the more powerful structural reason is the way our organizations are organized. Organizations, even today, are predominantly collections of functional specialists. Very often, people see their job as representing their function. The greatest shortage in most organizations today is not of great functional specialists but of great business people who can integrate the activities and the mindsets of various functions to do two things. Do the best job for the customers and do it in an extraordinarily profitable way. One of the reasons that clients wanted to have a story that was accessible to everyone is that they want people to spend more time thinking about the business, not just thinking about their own functions.

WJ: What would your advice be to aspiring business leaders, like us, on how to make their organizations reap more profits?

AS: I would say that the most important thing is to understand what leadership means. Someone recently told me that if you want to understand leadership and you are in an organization, don't look up. Look in the mirror. And so, I think the first step is to understand that anybody with the right ideas can play a leadership role. I think the second thing is to have the right content and the right agenda. And I think a fantastic way to begin is to start asking the series of questions that are posed in The Art of Profitability. 1. How does profit happen? 2. How do we get everybody in our organization to understand it and act on it? 3. What's our next profit model? No profit model is forever. And no. 4 is the greatest achievement – doesn't happen very often but it is phenomenally valuable. It is to ask the question, can we create a unique way of being profitable? Dell has done it. Starbucks has done it. Toyota has done it. It is most important to understand how profit happens and get everybody aligned behind it. But it is exceptionally valuable to ask the question – can we develop a unique profit model in our industry, so that we can compete differently from the others. And the rewards of that are just phenomenally high.

WJ: Thank you! Is there anything else you would like to add?

AS: There is one more important thing. We are in a very unique moment in economic history, and unfortunately, a very tough and long lasting one. We are not going to grow our way out of it. We will have to earn our way, or profit our way, out of this problem. People who genuinely understand profitability – it doesn't take more than five or six months to really learn it – and who can bring that thinking and those skills to a company will play a disproportionately important role in getting companies out of the economic quandary we are in. Think of the last six months. How many things have you read that were prospective in nature – that said, here is the problem, we created it, now, here are our priorities and how this organization would like to work its way out this problem. Understanding profitability and acting on it is one of those priorities, and it really doesn't matter if you are the CEO or someone who is just starting work.