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Our
client
was
a
company
who
truly
prided
itself
on
its
closely‐held
family
culture.
The
 owner
believed
in
maintaining
a
9:00am
to
4:00pm
work
schedule
and
giving
all
 employees
a
12%
raise
each
year
in
order
to
maintain
employee
retenCon
and
morale.

 When
the
client
came
to
Wharton
SBDC,
the
client
stated
that,

 “I
have
begun
to
recognize
that
the
way
I
am
behaving
is
going
to
ruin
the
business,
 which
would
ruin
me,
as
the
business
is
my
career
and
livelihood.”
 “I
take
care
of
everyone
else’s
needs
first
–
my
clients’
as
well
as
my
employees’
‐‐
and
 those
needs
are
insaBable,
so
I
rarely
get
around
to
what
is
good
for
the
business.”
 For
the
client,
it
was
important
to
figure
out
a
way
to
increase
profitability
in
order
to
 keep
the
company
in
operaCon.




AMer
iniCally
looking
at
the
client’s
financials
it
was
clear
that
revenue
was
relaCvely
flat
 year
over
year
and
that
profitability
was
quickly
declining.
The
client
came
to
the
 Wharton
SBDC
with
a
desire
to
increase
profits
not
only
just
because
they
were
 concerned
about
the
ability
to
meet
payroll
moving
forward
but
also
in
hopes
of
 reaching
a
point
where
they
could
sell
the
company
in
a
few
years.



The
consultants
discovered
the
source
of
the
client’s
rapidly
declining
profits
was
due
to
 the
company’s
spiraling
expenses.
With
revenue
remaining
stagnant
and
expenses
 nearly
quadrupling
year
over
year,
it
was
evident
that
the
client’s
increasingly
climbing
 costs
were
eaCng
away
at
profitability.



• Changes in Expenses • 2004: ↓$43K • 2005: ↑$21K • 2006*: ↑$79K


The
consultants
realized
the
issue
they
had
to
tackle
was
an
issue
of
profitability
and
 there
were
two
ways
they
could
tackle
the
problem.



Profitability Problem Increase Sales with Current Employees and Payroll •  Create a better marketing strategy for new customer acquisition •  Price more appropriately • Target more profitable customers

Cut Expenses

•  Change mix of employees •  Downsize •  Exchange salary for subcontracting

•  Change mix of output •  Replace custom sales with syndication sales •  This will call for downsizing

•  Limit 12% yearly raises •  Increase employee hours or productivity (i.e., decrease hourly wage)


The
first
issue
the
consultants
explored
was
the
client’s
profitability
by
client.
It
was
 noted
that
their
smaller
customers
were
not
profitable
and
conversely
their
profitability
 was
Ced
to
a
few,
large
accounts.
The
consultants
deduced
that
the
client
needed
to
 come
up
with
a
markeCng
plan
that
focused
on
acquiring
larger,
more
profitable
 accounts
especially
since
the
company
had
not
acquired
any
new
large
accounts
in
the
 past
three
years.




In
addiCon,
there
was
the
issue
of
employee
compensaCon.
As
stated
earlier,
the
 entrepreneur
gave
every
employee
a
12%
yearly
raise,
resulCng
in
salary
rates
above
 industry
standards.
In
addiCon,
due
to
the
work
culture
the
entrepreneur
had
created,
 at
peak
Cmes
of
the
year
the
company
would
in
turn
have
to
hire
seasonal
workers
 which
added
to
the
company’s
expenses.
For
a
firm
that
was
generaCng
five
Cmes
less
 revenue
than
the
average
firm
in
the
industry,
their
payroll
should
not
have
been
more
 than
twice
the
naConal
average’s
payroll
as
a
percentage
of
revenue.


Revenue

Payroll

Payroll as % of Rev.

Paid Employees

Average Salary

National Average

$5,496,646

$1,137,896

21%

21

$54,654

Client

$1,053,128

$557,586

53%

9

$61,934

Source: 2002 Economic Census


For
this
client
who
expressed
thoughts
of
selling
the
business
in
the
future
it
was
 extremely
important
to
increase
the
company’s
profitability
so
that
the
desired
 (higher)
price
upon
exit
could
be
achieved.
AMer
extensive
research,
interviews,
and
 financial
analysis,
the
consultants
concluded
that
in
order
to
operate
successfully,
the
 clients
costs
must
be
structured
in
a
way
that
mirrors
their
revenue
growth.
In
order
to
 do
this,
the
following
changes
were
recommended:
 –  Reallocate/reorganize
employees
to
beYer
match
customer
profitability
with
 employee
costs
 –  More
frequent
mid‐project
project
checks
versus
target
should
occur
to
ensure
 that
proper
pricing
esCmates
are
going
forward
 –  No
projects
below
$5000
will
be
accepted
 –  Restructure
salary
and
bonus
scales
to
include
both
tenure
and
merit‐based
 compensaCon
(AEer
interviewing
the
company’s
employees,
in
contrast
to
the
 entrepreneur’s
assumpBon,
employees
stated
they
would
not
leave
if
they
did
 not
receive
the
yearly
12%
raise
or
worked
8
hour
days.)
 –  Broaden
the
company’s
customer
base
and
reduce
the
company’s
dependency
 on
one
large
client
 •  Redesign
and
re‐launch
the
company’s
website
 •  Create
new
promoConal
materials
(collateral),
as
well
as
business
proposal
 presentaCon
materials

 •  AYend
business
presentaCon
and
negoCaCon
websites
 •  AcCvely
encourage
higher‐level
managers
to
become
more
involved
with
 selling
and
the
new
customer
interface



Case Highlight