03 July 2009

Gordon Ramsay and Radical Profit Improvement

If, like me, you enjoy good food, good wine, and real cooking, and occasionally have time to watch television you have probably seen one of the many programs that Gordon Ramsay has made where he flies in to turn around a restaurant that is in deep trouble. These shows typically revolve around scenes showing gross incompetence that scare you from ever going to restaurants again, and the very interesting and colorful use of the English language by the three Michelin-star cook.

In addition, there is another commonality across these programs that could be useful to those of you facing a situation requiring a dramatic turn-around. An activity that has been carried out in all the restaurant turn-arounds that I have watched is a ruthless pruning of the menu to enable the restaurant to focus on a few dishes that are a) popular, and b) within the capabilities of the restaurant staff.

I believe that this is an excellent analogy to what many other organizations also need to do in these difficult times. For most companies a "back to basics" strategy is a much better way to improve profitability than a flat 10% across-the-board reduction of costs. (see Setting up a successful cost-reduction project for more information). Watching a few restaurant turn-around shows also gives a good lesson in how this type of consolidation can be carried out. As in the restaurants being helped in the television programs, the focus of the new product portfolio in your organization should be "popular and simple".

Finding out which of your products or services is popular should be fairly simple as your financial data should tell you which products give the highest sales. This initial analysis, however, should be expanded by also looking at which products are sold to a broad customer base and cover a wide set of customer needs. The typical steps carried out for the restaurants in the show also include market research by walking round town to look at which other restaurants exist and which ones are crowded. Similar steps in the case of most companies would be to carry out some fairly straight-forward market-research by interviewing a few clients.

Finding out which of your products are simple to produce involve looking at financial data and analyzing your production process. Your financial data should give some indications on the profitability of your individual products (direct margins, etc), but this data should be used with care. The main issues with accounting data include a) tax issues often play a large role in deciding the accounting rules that are followed, b) unrealistic assumptions are often made related to costs being fixed or variable, and c) many indirect costs are not sufficiently linked to their real cost-drivers (i.e. the products actually causing the costs to be incurred).

An analysis should therefore be carried out of the production process itself. For a restaurant this is fairly simple as it is possible to directly see the dishes that create chaos in the kitchen. In a larger organization with processes that typically cover more time, space, organizational units, and people this can become quite a complex undertaking. Complexity in itself, however, is no reason not to start. There are several possible starting points for such an analysis including customer interviews (which of our products are you unhappy with and why), interviews with sales people and service representatives (which products give the most complaints), interviews with production people (which products are the most difficult to make and which result in the most rework), etc.

By combining the results of these two analytical streams it should always be possible to determine products that are a) not popular, and b) complex to make. The short list resulting from this combination will always be a good starting point for carrying out a "pruning of the menu" in your organization.

Follow the links if you are interested in more information on reducing complexity, project planning or project management training.

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