This article will take you through the steps required to define business goals and put the goals into action. In this first part we will look at establishing the baseline, setting the goal, and doing the analysis to figure out how you will get from A to B. In the second part we will break down the goals established in step #3 into accountabilities for the different roles in your organization and then discuss how you might tie these accountabilities to a tightly woven incentive plan framework that aligns each person in each role to the portion of your business plan they can control.
5 Steps To Defining Business Goals
Step #1: Know where you are starting from
Begin at the beginning. Spend some time getting to know your business. Freight brokering is a data rich environment with many statistics available to track and many well-published industry benchmarks. Spend some time looking at your financial reports and your load-data to understand your business and how it has changed over time.
There are 10 key statistics to track:
Top-line revenue (amount collected from shippers)
Purchased transportation costs (amount paid to carriers)
Bottom line Net Revenue/Gross Margin (amount you get to keep to run the business)
Margin % (Net Revenue divided by Top-Line Revenue)
Load Count (or Trip or Order count, depending on what is meaningful to your business)
Revenue Per Load (RPL) or Revenue Per Container (RPC)
Profit Per Load (PPL) or Profit Per Container (PPC)
Cost of Compensation for all Employees excluding owners (Salary + Cash Incentives, Commissions, Bonuses)
Cost of Compensation as % of Revenue and % of Net Revenue
Net Income/Operating Income (what is left after all expenses are paid)
You will then want to cut these statistics the following ways, looking for trends over time (look at 2011 vs 2012 and then look at the quarterly, monthly, weekly and daily trends)
By Customer (how much comes from your top customers?)
By industry, lane, type of freight or whatever other groupings are significant to your business
Look at your customer or lane summary for new groups you may not have noticed before
By Division, Team or Unit (this is where cost of compensation as % of Net Revenue can be helpful)
By Carrier (how concentrated is your carrier base?)
There are good software packages available to help with this analysis. Excel is useful and readily available, but it is limited when you want to do quick analysis of large volumes of data that you will want to update regularly. It also requires a significant time investment to get really good at it. There is much Excel can do, but most of its true strength remains hidden to casual users and I’ve seen companies waste vast quantities of time doing manual analysis in Excel when a small investment in a few training classes could save countless hours and improve your business understanding.
For quicker visualization and more intuitive set up, there are other programs like Tableau and Good Data. These are more expensive than Excel and also will require some understanding but it is well worth the effort to be able to see many dimensions of your data at one time.
Step #2: Establish a long-term and a short-term goal
Once you know where you are beginning, define where you want to go. Often companies establish 5 year goals and then back into the annual growth required to get there. That is fine as long as the growth expectation is realistic and reflects your staffing plans, the economy and your willingness to work 90 hours a week. As the old saying goes, “If wishes were horses, we’d all ride free” and writing down a goal isn’t going to make it happen. It will take hard work and understanding of the different tools at your disposal that will help close the gap from your “AS IS” state to your desired “TO BE” state. (Expensive consultants call this “Gap Analysis.” I call it good business planning.)
Step #3: Conduct a Gap Analysis using the RANP Formula
(sounds fancy, huh?...but it’s not that hard)
When doing the Gap Analysis, consultants use another tool called a “PAR Analysis.” For Freight Brokers it should really be called a RANP analysis, as the standard PAR Analysis misses one of the key tools that Freight Brokers have at their disposal: Negotiation. Also, the letters are better in this order as it represents the right priority focus.
R = Retention
How much of your business will you retain from the prior year or period. It is rare for the answer to be 100%. Look at your history. Understand your customer risks. Establish numbers that represent best case and worst case scenarios and use a value in between, but leaning to the worst case side.
A = Acquisition
How many new customers can you get in the next year and what will be their average size? Note that you will not acquire all customers on January 1, so you should use the “Rule of 78s” to estimate the actual income you will recognize in the year from customers acquired throughout the year. If you are planning that you could acquire 12 customers at $100,000 in Gross Profit each, you may be tempted to say this will bring you $1,200,000 in additional gross profit during the year. This would only happen if all 12 customers started on January 1. If instead it was more realistic to think that you will acquire 1 new customer a month, then you would multiply the total expected revenue by 78/144 (it’s around 54%) to get a better sense of how much money you will actually collect from these 12 customers during the year.
N = Negotiation
This one you know, or you wouldn’t still be in business as brokers, but it’s worth spelling out. How much in additional gross profit can you add to the bottom line simply by doing a better job negotiating with carriers? If your top-line revenue was $10,000,000 and you were averaging 14% profit, then you kept $1,400,000 in gross margin to run the business. A 1% improvement means an additional $100,000 in gross profit with no increase in labor costs and no new customers required.
What surprises me is how many brokers know this statistic, even preach this statistic, but then do nothing to tie improvement in GP% into the carrier incentive plan. Humans are inherently lazy and will take the path of least resistance. Should I cover the load now and leave for the day, or try another carrier that I can get a better rate with? Unless they have a PERSONAL reason to care or you are incredibly lucky or good with hiring decisions, most employees will go for the first option. And paying them solely on GP$ won’t cut it either as then you are dealing with the “Bird in the Hand” syndrome…most of the time they will go for the sure thing now even if it means less $ than they could get with a bit more work (and risk). Paying a higher % commission for a higher GP% is a commonly used scheme, but it often doesn’t work quite right either, as then employees will then swing the other way and not cover loads they should be covering because they don’t want to get paid less. Now you risk losing customers! The answer is often a delicate balancing act between GP$, Load Count and GP%...depending on the exact needs of your business (as revealed by conducting the RANP analysis).
P = Penetration
How much more can you get from your existing customers? What low hanging fruit is being ignored because you don’t have anyone specifically focused on growing your existing book of business? What additional lanes or locations could you get from your current customers? But be careful and consider what your pie chart revealed about your current customer mix. If you already have the majority of your business concentrated in a handful of shippers, you focus needs to be on the R (Retention) and the A (Acquisition) tools as you know you are walking a tightrope of risk with too many eggs in too few baskets. Conversely, if you have hundreds of onesie/twosie shippers then you should probably back off on the A (Acquisition) and turn up the heat on the P (Penetration).
In Part II we will look at how to define business goals by looking at how each person in your organization can play a part in helping you close the gap to your goals, and how you can (and should) make it worth their while to do so.
Step #4. To Understand Business Goals and Objectives...Conduct a Value Driver Analysis (and I’m not talking about Owner/Operators).
In Step #3, we identified four key value drivers of profit in a broker: * R: Retention of existing customer business * A: Acquisition of new customer business * N: Negotiation with carriers and customers to retain more profit * P: Penetration of existing customers to solicit more/different business Now you need to assign accountability for those goals to specific people in your organization by determining which roles drive which parts of your value chain and can affect the greatest change. This is where role clarity becomes very important. For traditional “cradle to grave” or agent model brokers, the answer initially is that one person (the broker) is expected to be accountable for all four of these results. However, even in organizations that hold to the “cradle to grave” model, it is common for a broker to add help in the form of dispatcher, order entry, and/or track & trace support when the book of business gets big enough. This is the evolutionary path taken by organizations familiar with the benefits of job specialization, the history of Henry Ford and the industrial revolution. In a heavily transaction oriented business one person cannot do it all, and when they try it is colossally inefficient. The best organizational approach is one which assigns specific accountability for each of the tasks to a specific role in the organization. If you think about your own life, how well do you accomplish many tasks done at the same time? Can you (1) train for a marathon, (2) spend more time really focusing on your family, (3) read 50 business books, and (4) grow your business by 50%? You can probably do all of these things, but not at the same time. Humans have the capacity to handle one or two top priorities. The rest of the things are done partially or not at all. A good mantra is “Effort Follows Focus” and if you think about true super star athletes, musicians, or anyone else who does something incredibly well… you will see they have one thing in common…FOCUS. When looking at the RANP analysis, the easy split is usually between shipper (R/A/P) and carrier (N) focus. Many organizations have taken this step, but it still interests me how much resistance there can be due to a lack of trust and training on the carrier sales side (“But if I’m not calling the carrier, how do I know the freight will be covered?”). This concern is usually resolved with better training, better technology, and a better compensation plan for the carrier sales team. The harder split is between existing customer (R/P) and new customer (A) focus. The number one complaint that we hear from our clients is lack of time spent cold-calling new customers. The adage is that if you blend a hunter and a farmer, you get…a farmer. It’s true. Humans will fill their day dealing with existing customer problems, and put off cold calling for new customers so that there is no time left in the day to do it. Everyone has this problem and many even know what the solution is (separate your hunters and farmers into two distinct roles), but few actually are able to make this change, and the reason is usually a poorly designed incentive plan.
Step #5: Connect the dots to your business goals and objectives by fixing your incentive plan.
There is nothing more ludicrous than a business owner saying they can’t run their business the way they need/want to because they are hindered by the incentive plan they created. Talk about being tangled in your own underwear! It is possible to fix ANY incentive plan, no matter how poorly designed or how long it has been in place…you just need to be clear about how and why you are making the change, and what you will need to do to keep key players whole during the transition. Once you have broken down your key value drivers (RANP) and assigned accountability to the roles in your organization, the options for your incentive plan become pretty clear. For example, your value driver analysis may look something like this: * 2012 Results: $1,000,000 in profit; goal is to retain 90% of this or $900,000. * 2013 Goal: $1,200,000 in profit. * GAP = $300,000 Note: I’m using small numbers that are easy to use for the math. Obviously if your organization is significantly larger than this, you will just need to scale things up. Retention Goal: Retain 90% of our existing business by providing 98% on-time delivery, focusing more on customer service, preventing service failures, and working to cover more loads (limited give backs). * Assigned to: Account Manager to focus on customer service (increase communication) and Carrier Sales for on-time % and high # of loads covered (reduce give backs) * Incentive Plan Components:
Account Manager might be paid for retaining 95% of customers at 95% of prior year’s profit and/or load count levels. If they can retain 97%, 98%, 99% or 100% of customers at 100% of last year’s level, then they should earn additional incentive. For consideration: Is it better to keep more customers (as a number of customers) or a higher % of each customer’s business? Consider your book of business: if your business is concentrated with a few shippers, you better keep all of them at 90%+ of prior year’s volume. If your business is dispersed among hundreds of small shippers, then you maybe only need to keep 80% of them at 95% of prior year’s volume (fire some customers) and focus instead more on the Penetration part of the equation with your best accounts.
Carrier Sales might be paid for a high number of loads covered and good service rates. It’s likely that you may need a team approach for number of loads covered to prevent dysfunctional truck hoarding, and no the entire plan is NOT based solely on number of loads covered, but it may be a strong secondary component after gross profit dollars and GP%.
Acquisition Goal: Acquire 12 new customers who can average 10 loads a month. At $200 PPL that means each new customer will bring in $2,000 additional gross margin per month or $24,000 a year. At year-end, we should see $24,000 in additional profit per month, but over the course of this year we will only see $155,520 in additional gross profit if we add 1 new customer per month (see the “Rule of 78’s” from first part of the article). * Assigned to: Inside Sales to focus on getting in new shippers who have the type of volume that will help us reach this objective. * Incentive Plan Components:
Inside Sales might be paid a two-tier bounty for getting new customers with a small initial payout for first load and a larger payout when customer averages 10 loads a month in 3 consecutive months.
Account Manager might be paid on the growth of their total portfolio which includes new customers and a bounty when a new customer handed over by the inside sales rep reaches 50 total loads in a 6 month period.
Negotiation Goal: Improve GP% by 1% ($1m of profit with 14% margin = $7.1m in revenue; an extra 1% profit = $71,000). * Assigned to: Account Manager to increase rates to customers and Carrier Sales to negotiate for cheaper trucks. Account Manager needs to focus on customer service value to justify additional cost to shippers. Carrier Sales needs to focus on building loyal carrier base with good freight opportunities to decrease price per load sensitivity. * Incentive Plan Components:
Account Manager might be paid more if the average Revenue Per Load (RPL) is increased from $1,400 to $1,600.
Carrier Sales might be paid more if the average GM% is increased from 14% to 16%. You may also want to include a specific component to reward for repeat carrier usage to help support decreased price sensitivity.
Penetration Goal: Secure 12 new lanes that generate $1,000 per month (5 loads at $200 PPL) for an extra $12,000 per month at year end or an extra $78,000 in accumulated profit over the course of the year ((78/144) x ($12,000 x 12)). * Assigned to: Account Manager to find new lanes. Carrier Sales to ID leads with consignees or other parties that could expand existing base of business. * Incentive Plan Components:
Account Manager might be paid a new lanes/locations bounty when the lane reaches 5 loads per month average over a 3 month period.
Carrier Sales might be paid using a lead generation expectation in their Individual Performance Modifier.
Now, we need to check on if we will achieve the $300,000 goal, and we will: * $155,000 from new customer acquisition * $71,000 from better negotiation with shippers and carriers * $78,000 from better penetration of existing customers The last bit of the puzzle to fill in is to make sure that everyone in the organization has some incentive that is tied to the attainment of the overall company goal of $1,200,000 in profit. For a small company this is relatively easy as everyone can see and impact the total result. For a big company, you may need to break it down into divisional, regional or team goals, provided that doing so does not create dysfunction and infighting across the teams. Note that I did not say HOW MUCH any of these roles would be paid under the particular incentive components used. The answer to this needs to make sense from an economic perspective (are we retaining enough of the profit to achieve our objectives?), from a competitive labor perspective (is the pay sufficient to attract and retain talent in your labor pool?), and from a historical perspective (how much did Joe or Sally make previously and will this plan pay enough to retain them?). These questions must be answered with careful economic modeling of the entire system. Resist the temptation to focus too much on one person at a time as if they are their own P&L. You are running a business that has many interconnected parts that support one another – the system needs to function as a whole, with each component focused on maximizing the value that is within their ability to control. When you set it up this way, you will find the sum of the parts is greater than the whole, and your objectives will be well within your reach.
These excerpts were originally published in the February 2013 and March 2013 issues of The Logistics Journal. (member login required)