Bad Profits

A book review of "Islands of Profit in a Sea of Red Ink".

Jonathan L. Byrnes, a senior lecturer at MIT, is able to put together his entire thought leadership philosophy into a single question. He poses it to every executive he works with: "Do you have bad profits?"

He built upon this idea in a book titled "Islands of Profit in a Sea of Red Ink". A BCC member very kindly sent me a copy, so I thought I might as well post my thoughts on it here.

The main premise of this book is simple: A large part (30-40%, according to his research) of every business is unprofitable. This is true by any measure, including clients, offerings, and interactions. And 20% is so profitable that it provides all the earnings after offsetting the losses.

Companies take unprofitable clients for a simple reason - they bring in revenue. And while the size of the contract is the first number you look at, the actual profit margin is often hidden behind complex calculations or accounting tricks. That's why Byrnes pitches a "profit mapping" process - it makes it easy for companies to manage profitability on a day-to-day, client-by-client, product-by-product basis.

This premise is as old as it sounds. You probably know the 80/20 rule by heart. But what can we, boutique consultancies' founders, learn from such a book?

In my opinion, very little. Apart from this being written for a different audience (C-level or director executives in large global companies), it is simply not relevant for smaller and specialized businesses that sell consulting:

  • Tied offerings: Large companies have a large product and service line, which makes it easy to discontinue and take out individual offerings of the market. This is not the case for boutique consultancies. You can't measure each offering in isolation - most of the value lies in how the ecosystem works together.
  • A handful of clients: Many of the strategies suggested by Byrnes are designed for businesses with thousands of customers. That's the exact opposite of the consulting businesses we're leading.
  • Small scale: Yes, knowing your numbers is an absolute requirement for growing a profitable business. But it makes no sense to make for a 5, 10, or even 50-people consultancy to measure profitability on a day-to-day basis. Especially since developing this capability requires a considerable time and money investment.

There are some basic account management principles that can be applied to businesses of all types - such as communicating better and more often, looking for opportunities to sell to different business units, etc. The book is also a good reminder of how important it is to protect your bottom line. But that's it.

If you're looking for a book to better manage your boutique consultancy, this is simply not a good fit.

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