Consultants - What GENERALLY is the culprit for low /declining profits?

Question

Greetings experts and those who have worked on consulting engagements -

What is the typical culprit for declining profitability? Revenues slowing or costs increasing? Both?

Thanks

Answer 1

Hi Anonymous,

there is no general answer for this – it could be either of the options. Also, even if there was a most common type, it would not make sense to consider it as starting point without any further check. The best thing you can indeed do at the beginning of a case to verify which area to investigate is the following:

Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (by product, customer, geography, distribution segment, etc).
Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount

In this way you can be sure you are always analysing the right area.

Best,

Francesco

Answer 2

Hi,

Do you mean what is the most common problem? I guess there is no statistics and I've seen revenues, costs and both.

Although the two most common pitfalls that you can face in the profitability cases are:

Mix problems (Geographical, Channel, Customer, etc) - when prices and qtys are the same but the mix has changed
Revenue streams problem (Different sources of revenue or products) - when candidates forget to check what are the different revenue streams and miss one

Best