The short answer
Quad 4 is B-customers buying tail products — the bottom of your customer base buying the bottom of your product line. It is where profit goes to die.
In most middle-market industrials Quad 4 is around four percent of revenue — which sounds like a rounding error, and that is exactly the trap. It is also somewhere between twenty and forty percent of capacity. Order lines, service minutes, expedites, credit memos, engineering changes, SKUs held, quote revisions, collections calls. Every one is a unit of capacity, and Quad 4 consumes them at five to ten times its share of revenue.
Complexity hides because there is no expense category called “too much stuff.” No line, no accrual, no owner, no variance report. Your finance team cannot show it to you, because they can only show you things that have a line. So it hides in capacity, in cycle time, in the fourteen percent discount somebody granted in 2019 that nobody has revisited.
The audit is the Dirty Dozen — twelve specific sources of unprofitable complexity. Audit all twelve, size them in dollars, and pick the top three by dollars, not by drama.
At Power Band Parts — $310M, 32% gross margin, 8% EBITDA — four moves (a discount freeze, the commission ledger, payment terms, and MOV/MOQ) took order count down 38%, moved average gross margin per order from 19% to 31%, lifted EBITDA 1.9 percentage points in the first quarter, recovered ninety days of finance capacity, and closed an outsourced call center. Nobody was laid off. We stopped doing things.
And when the pushback comes — “but that’s still four million dollars of revenue” — remember: the four percent is not the cost. The four percent is the bait.
What happens the moment you announce what you’re going to stop doing?
Day one of the new phase — not day one of the hold, day one of the simplification.
We had spent eleven weeks building the segmented profit and loss statement. We had the quads. We had the kill list. On a Sunday night I sent the leadership team the note that said: starting tomorrow, here is what we stop doing.
Monday morning. Seven-forty. An email from one of our largest distributors. They want a program renewal — expanded terms, expanded stocking commitment, a price hold for eighteen months.
The product line in that program was a Quad 4 product, and the customer mix underneath it was B-only. It was, almost line for line, the exact set of accounts my team had been told the previous evening we were exiting that week.
Twelve hours.
I would like to tell you I had a plan for that. I did not. What I had was a room full of people watching to see whether the thing I sent Sunday night was a strategy or a mood.
That is the lesson. The test always comes immediately — usually from your biggest account, usually before your own team has finished reading the memo. Your customers know which of your products they are getting away with buying, and they will move to protect that before your operations people have updated the item master.
Plan for the test. It’s coming Monday.
What exactly is Quad 4, and how big is it?
Let’s define it precisely, because it gets used loosely and loose definitions produce loose decisions.
Segment your customers into A and B — A is the vital few at the top, B is everything else — and segment your products the same way. Now you have four boxes. Quad 1 is A-customers buying A-products: that is your business, protect it with everything you have. Quad 2 and Quad 3 are the mixed boxes — good customers buying tail products, small customers buying core products — and those are opportunities for a different conversation.
Quad 4 is B-customers buying tail products. The bottom of your customer base buying the bottom of your product line.
Here is the number that makes people sit up. In most middle-market industrials, Quad 4 is around four percent of revenue. Four percent. Which sounds like a rounding error, and that is exactly the trap.
It may be four percent of revenue, but it is somewhere between twenty and forty percent of capacity. Order lines, service minutes, expedites, credit memos, engineering changes, SKUs held, quote revisions, collections calls — every one is a unit of capacity, and Quad 4 consumes them at five to ten times its share of revenue.
How do you answer “but that’s still four million dollars of revenue”?
You will build this analysis, put it on a screen, and somebody in that room — usually somebody senior, usually somebody good, usually somebody whose compensation is attached to revenue — will say the sentence: “But that’s still four million dollars of revenue.”
How you answer in the next thirty seconds determines whether the next six months are real or decorative. Three parts.
Part one. Ask what the margin is on it. Not the gross margin off the ERP — the contribution after the cost to serve: order handling, service minutes, freight, returns, working capital. Make somebody go get it while the room watches. It is almost always between zero and negative.
Part two. Ask what it consumes. Put the capacity number next to the revenue number. Four percent of revenue, thirty percent of order lines. Say both in the same sentence and let the room sit in the gap.
Part three. Reframe the question. This is the part that changes minds. The question is not “do we want four million dollars of revenue.” Of course we do. The question is: what would we do with thirty percent of our capacity if we got it back, and is that worth more than four million dollars at zero margin?
The answer is yes, by a factor of three or four, essentially every time.
Which brings the line I want you to carry out of this episode: the four percent is not the cost. The four percent is the bait. It is the thing that looks like revenue and functions as a trap, and it keeps you from doing the profitable thing because you cannot bring yourself to walk away from a number with a dollar sign in front of it.
Why doesn’t complexity show up anywhere in your financials?
Complexity is the silent killer of profit, and it is silent for a structural reason, not a psychological one: there is no expense category called “too much stuff.”
There is no line on your profit and loss statement labeled complexity. No accrual, no owner, no monthly variance report. So it hides where you cannot book it — in capacity, in cycle time, in the fourteen percent discount somebody granted in 2019 that nobody has revisited, in the three extra days it takes to close the month because of exception approvals. Your finance team cannot show it to you, because they can only show you things that have a line.
And here is the part that keeps CEOs from being angry about it — which matters, because anger makes you stupid in this particular meeting: every one of these started as a good idea.
The custom configuration was to win a real customer. The extra channel was to reach a real market. The pricing exception saved a real order in a quarter when you needed it. The extra report answered a fair question nobody ever asked again. The extra layer was a good manager who needed a promotion and there was nowhere else to put them.
Nobody woke up and decided to make the company complicated. They made a hundred reasonable local decisions over ten years, and the aggregate is a business carrying thirty percent of its capacity on four percent of its revenue.
So the instruction is not “stop being stupid.” It is concentrate, don’t spread — your resources, your attention, your capacity, your best people concentrated on the vital few, not spread evenly across everything you happen to currently do.
What are the Dirty Dozen?
Twelve sources of unprofitable complexity. These are the twelve I look for in every business, in this order.
One. SKU sprawl. The item master nobody has pruned. Run it by trailing twelve-month volume and look at the bottom quartile.
Two. Customer customization. Special packaging, special labeling, special palletizing, special anything. Each one was a yes that became permanent.
Three. Channel proliferation. Direct, distribution, dealers, marketplace, national accounts, a specialty rep group. Every channel needs its own pricing, terms and conflict management.
Four. Pricing exceptions. The one-off deal price that never expired. Count how many active prices exist for your top ten SKUs. The number will surprise you and it will not surprise your CFO.
Five. Custom contracts. Bespoke terms, bespoke SLAs, bespoke rebate structures. Every one is a document somebody has to read before answering a simple question.
Six. Low-volume products. Distinct from SKU sprawl. Real products with real part numbers that move eleven units a year and occupy a production changeover, a supplier relationship and a shelf.
Seven. Niche services. The thing you do for three customers because you did it once. Field calibration. Custom kitting. Installation in one region only.
Eight. Redundant systems. Two ERPs from an acquisition you never integrated. Three CRMs. A pricing tool and a spreadsheet that disagree.
Nine. Organizational layers. Count the layers between you and the person who touches the product. If it is more than five in a two-hundred-million-dollar company, you are paying for translation.
Ten. Meeting overload. Pull the calendars. Recurring meetings, headcount, hours per month, times loaded rate. It is usually a bigger number than the last cost initiative you ran.
Eleven. Report proliferation. Every report produced and not read. The tell: cancel it for one month and count the complaints. Zero complaints means it was free money.
Twelve. Process variation. Four plants doing the same job four ways. Three branches quoting the same product three ways. You are paying for the variation and getting nothing back.
What is the method — and why do people get step two wrong?
Four steps.
Step one. Audit all twelve — not the three you already have opinions about. An owner per category, two weeks, and a count and a dollar figure. Not a narrative.
Step two. Pick the top three by dollars, not by drama.
This is the one to sit on. In every room I have been in, the loudest item is not the biggest item — it is the one with the best story attached: the customer who yells, the product line somebody is proud of, the process fight two VPs have been having for three years. Drama selects for the item where sunk cost is highest and payback is worst. Rank by dollars: contribution recovered plus capacity recovered at loaded rate. Top three. Everything else waits.
Step three. Build an elimination plan with named owners and dates. A name, a date, a definition of done. Not “reduce SKU complexity” but “nine hundred and forty SKUs deactivated in the item master by March 31, owner Karen.” If you cannot write it that way, you haven’t decided anything.
Step four. Communicate loudly what you are going to stop doing.
Loudly — the opposite of what your instincts say. Quiet simplification does not survive contact with the first pushback, because when a customer calls and yells, the person taking the call doesn’t know whether the policy is real, so they make an exception, and forty exceptions later there is no policy. Announce it: internally in a room, externally in writing, with dates. Make it expensive to reverse. That is not bravado, that is engineering.
What did the four moves look like at a $310 million company?
Power Band Parts. Three hundred and ten million dollars, thirty-two percent gross margin, eight percent EBITDA. Respectable, unremarkable, and stalling.
Move one. The discount freeze. We isolated the Quad-4-only book — accounts that bought nothing but tail product. That book carried average field discounts of fourteen percent, granted over years by good salespeople, one reasonable emergency at a time, and never revisited because nobody’s job was to revisit them.
We froze them: no new discount authority on that book, existing discounts expiring at the next order. We budgeted to lose roughly a third of the volume — we told the board that was the plan, and we would have run the play if we had lost the whole third.
Result: EBITDA rose 1.9 percentage points in the first quarter after implementation. And a second result I did not forecast and now look for every time: finance recovered ninety days of capacity. Their year had been full of exception approvals, credit memo processing and pricing reconciliation on that book, and when the exceptions stopped, a quarter of a finance department’s year came back. I had no line item for that. Nobody does. That is the point.
Move two. The commission ledger. At the start of Q2 the Quad-4-only book came off the commission ledger. If you sold it, you no longer got paid on it. Three sellers chose to leave.
They were not bad people and they were not cheating. They had built a living on a book of business that was destroying value — and they built it because we paid them to. We designed the plan; they optimized against it exactly as designed.
That is the trade, and it is a good trade: you lose three sellers and you get a sales force pointed at Quad 1. But run it like an adult. Do it at a quarter boundary, tell them a full quarter ahead, and don’t pretend it isn’t a pay cut for some of them — they can do arithmetic, and the moment you insult their intelligence you have lost the ones you wanted to keep.
Move three. Payment terms. One hundred and eighty-seven Quad-4-only accounts moved to credit-card-on-order over a single weekend, with sixty days of advance written notice.
Twenty-two accounts declined — about twelve percent, and disproportionately the accounts our collections people could have named from memory. They self-selected out. We didn’t have to fire anybody and we didn’t have to argue: we changed the terms and the structurally unprofitable accounts removed themselves. Sixty days of written notice isn’t politeness — it is what makes the twenty-two a clean exit instead of a dispute.
Move four. MOV and MOQ. A minimum order value of five hundred dollars and a minimum order quantity at the SKU level.
Order count dropped thirty-eight percent. Average gross margin per order rose from nineteen percent to thirty-one percent — twelve points. The orders that disappeared were the twenty-two-dollar ones that cost forty dollars to process, and the customers who still wanted the product consolidated: four orders a month became one.
Then the downstream effect, the one I would point a board at. Customer-service calls fell by enough that we closed an outsourced call center — it existed to handle order status, expedites and short-shipment calls on high-frequency small orders. Take away the small orders and the calls stop. A whole vendor contract just ends.
Nobody got laid off to produce that. We stopped doing the work.
Who should own the Quad 4 exit list?
One structural point, and it determines whether any of this survives.
Do not let the people compensated on the revenue decide which revenue to cut. You cannot ask the lion to guard the antelope.
That is not a comment on anyone’s integrity. It is a comment on incentives, and incentives win. If your VP of Sales owns the Quad 4 exit list, that list will be short, it will contain the accounts he already didn’t like, and it will be revised upward twice before implementation.
So build the decision differently. Finance owns the analysis. Operations owns the capacity numbers. The decision sits with a small group chaired by somebody with no commission exposure, with you breaking ties. Commercial gets a full voice and owns execution and the customer conversations, because they are the only ones who can. Commercial does not own the list.
How do you run this in the next thirty days?
Move one. Run the audit and size the top three in dollars. An owner per category, two weeks, one page each carrying a count and a dollar figure. Then rank by dollars, take the top three, and put the other nine on a separate page in a drawer; visibly parked stops people relitigating them.
Move two. Pick one reversible move and run it in thirty days. Your organization has probably never watched you actually stop doing something, and the first one needs to teach them you will follow through — not that you will bet the company. Three candidates that all work: a minimum order value; a discount freeze on one defined book, with existing discounts expiring at next order; or payment terms on one account tier with sixty days of written notice. You are not trying to win the war in month one — you are proving that a policy in this company is a policy. Measure two things at day thirty: the margin effect and the capacity effect. The capacity effect is the one nobody logs and the one that compounds.
Move three. Write the pushback script and rehearse it before you need it. This is the move nobody does, and it is why programs die.
What goes in the pushback script?
Customers will push back. Distributors will push back. Your own salespeople will push back on behalf of customers who haven’t. Let them. Pushback is not evidence you have made a mistake — it is evidence the policy reached somebody, which is the entire point of having one.
So write the script, on a page, and rehearse it out loud with your commercial team, somebody playing the angry customer. Yes, it feels ridiculous. Do it anyway. The alternative is a twenty-six-year-old inside salesperson improvising your pricing strategy at four-fifteen on a Friday.
Four rules the script has to encode:
You do not apologize for the strategy — an apology is an admission that the policy is a mistake, and the customer will hear it as an invitation to keep pushing. Be sorry the change is inconvenient; do not be sorry about the decision.
You do not negotiate the principle in the moment — a concession made under pressure becomes precedent inside a week. Transition terms are negotiable. Timing is negotiable. The principle is not.
You do not promise to escalate — “let me take this up the chain” tells the customer the real answer lives somewhere else, and they will wait for it. The person on the call is the company.
You do not invoke the supervisor as a source of relief — no “I’d love to help but they won’t let me.” It is the most human sentence in the world and it is fatal: it tells the customer there is a “they,” and “they” can be worked on.
The script itself is short. The change is effective on this date. Here is what it means for your account. Here are your two options. I can help you with the transition, and I would like to. If the customer keeps pushing, repeat the two options — same words, warm, unhurried, identical. Repetition is the technique, not volume and not cleverness: the same two options, the fourth time as calmly as the first.
What does working look like, and what does theater look like?
Working is quiet and countable. SKU count is down and you can say by how many. Order count is down and margin per order is up. A vendor contract got cancelled. Somebody’s calendar has four fewer recurring meetings. And when a customer calls to complain, three different people give the identical answer without checking with each other.
Theater is a complexity reduction initiative with a name and a logo. Theater is a rationalization committee that meets monthly and produces a list of candidates. Theater is a Quad 4 exit list revised upward three times that hasn’t lost a single account.
The test is a count: how many things have you actually stopped? If the answer is zero, you are running theater — no matter how good the analysis is. And the analysis is usually excellent. That is what makes it convincing.
What happened to the distributor who emailed at 7:40?
We said no on the price hold and no on the expanded terms, and offered them the Quad 1 program instead, at list.
Six weeks later they took it. They are still a customer, at roughly two-thirds of the volume and about triple the contribution.
That was the trade we were trying to make.
Frequently asked questions
What is Quad 4 in the 80/20 framework? Quad 4 is B-customers buying tail products — the bottom of your customer base buying the bottom of your product line. In most middle-market industrials it is around four percent of revenue but consumes somewhere between twenty and forty percent of capacity: order lines, service minutes, expedites, credit memos, engineering changes, SKUs held, quote revisions and collections calls. The action is re-price or exit.
How do you answer “but that’s still four million dollars of revenue”? In three parts. First, ask what the margin is after the cost to serve — order handling, service minutes, freight, returns, working capital — and make somebody go get it while the room watches; it is almost always between zero and negative. Second, put the capacity number next to the revenue number and say both out loud. Third, reframe: what would we do with thirty percent of our capacity if we got it back, and is that worth more than four million at zero margin? The four percent is not the cost. The four percent is the bait.
What are the Dirty Dozen sources of complexity? SKU sprawl, customer customization, channel proliferation, pricing exceptions, custom contracts, low-volume products, niche services, redundant systems, organizational layers, meeting overload, report proliferation, and process variation. Audit all twelve — not the three you already have opinions about — with an owner per category, two weeks, and a count plus a dollar figure for each.
Why pick the top three by dollars rather than by drama? Because the loudest item is never the biggest item. The loudest item is the one with the best story attached — the customer who yells, the product line somebody is proud of, the fight two VPs have been having for three years. Drama selects for the item where sunk cost is highest and payback is worst. Rank by contribution recovered plus capacity recovered at loaded rate, take the top three, and park the other nine visibly so people stop relitigating them.
What results can a simplification program actually produce? At a $310 million industrial business running at 32% gross margin and 8% EBITDA, four moves — a discount freeze on the Quad-4-only book, taking that book off the commission ledger, moving 187 accounts to credit-card-on-order, and a $500 minimum order value with SKU-level minimum order quantities — cut order count 38%, raised average gross margin per order from 19% to 31%, lifted EBITDA 1.9 percentage points in the first quarter, recovered ninety days of finance capacity, and eliminated an outsourced call center. Nobody was laid off; the work stopped happening.
Who should decide which revenue to exit? Not the people paid on it — you cannot ask the lion to guard the antelope. Finance owns the analysis, operations owns the capacity numbers, and the decision sits with a small group chaired by somebody with no commission exposure, with the CEO breaking ties. Commercial gets a full voice and owns execution and the customer conversations. Commercial does not own the list.
How should the team respond when customers push back? Write a one-page script and rehearse it out loud before you need it. Four rules: do not apologize for the strategy, do not negotiate the principle in the moment, do not promise to escalate, and do not invoke a supervisor as a possible source of relief. State the effective date, what it means for the account, and the two options — then repeat the same two options in the same words, the fourth time as calmly as the first. Pushback is evidence the policy reached somebody, not evidence it was wrong.
Size your own complexity tax.
The Profit Map calculator builds the quad map from your customer and product mix — how much revenue and how much profit sits in each of the four boxes, and how much capacity Quad 4 is quietly consuming. It is the number you need before you freeze a discount, set a minimum order value, or hand anyone an exit list.
Related
- The 1,000-Day Framework — the full four-phase method
- The 80/20 Engine: Where Your Profit Actually Lives — the segmentation that produces the quad map
- Earn the Right to Grow: The Two-Line Ratio — the Phase Two diagnostic
Full transcript
EP05 — The Complexity Tax: Quad 4 and the Dirty Dozen
[00:02] A thousand days. That’s enough time to transform a company, but not enough time to waste. Welcome to the 1,000day CEO, the podcast about decisive leadership, sustainable growth, and building a business that thrives beyond any one leader. Your host is Bill Canady. Let’s make every day count. >> It’s day one of the new phase. Now, not day one of the hold, day one of the simplification. We spent 11 weeks building the segmentation profit and loss statement. We had the quads. We had the kill list. And on a Sunday night, I sent the note to the leadership team that said, “Starting tomorrow, here’s what we’re going to stop doing.” Monday morning, 7:40, an email lands from one of our largest distributors. They wanted a program renewal. There’s nothing unusual in that. And of course, they asked for expanded terms, expanded stocking commitment, a price hold for 18 months. The product line in that program was a quad four product. The customer in mix underneath it was a B only. The bottom of our customer base buying the bottom of our product line. Holy cow. It’s exactly what you’d expect to happen. And you definitely don’t want it to happen. It was almost line for line the exact set of accounts my team had been told the previous evening we were exiting that week. And here we got a big order on our hands. What are we going to do? 12 hours. I want to tell you I had a plan for this. I did not. What I had was a room full of people watching to see whether the thing I sent Sunday night was a strategy or just a move. Did the boss just say we’re going to do something and keep doing what we had been doing? Well, that’s the lesson, isn’t it? It’s why I open with it. The test always comes immediately when you need it the most and want it the least. Not eventually. Immediately. Usually from your biggest account. Usually before your own team has finished reading the memo, your customers know which of your products they’re getting away with buying and they’ll move to protect that before your people have
[02:02] updated the item master. They’re going to get ahead of it. They don’t have anywhere else to go to get this stuff. You’re the one they want. It’s hard to say no. So you got to plan for it. You got to plan for this test. It’s coming on Monday. Here’s the proof. Power band parts $310 million industrial business. when I took it. 32% gross margins. Not terrible. 8% Ebida DA kind of where you’d expect it to be in that low to mid single digits. This was in the upper piece of that. So, not horrible, but lots of upside. It’s respectable, unremarkable and stalling. When we ran the simplification, there four moves, which I’ll walk through in detail. Order count came down to 38%. Average gross margins per order went from 19% to 31%. We like that. Ibida rose 1.9 percentage points in the first quarter after implementation. And we closed an outsourced call center because the calls they had been justifying it had stopped happening. That’s right. Good things happening when you start simplifying. 38% fewer orders, 12 more points of margin on every order left. That’s not a cost program. Nobody got laid off to produce those numbers. We just stopped doing things that didn’t make any sense to us. So, here’s my promise. By the end of the next half hour, you’ll be able to name the 12 places unprofitable complexity hides in the middle market company. Size the top three of them in dollars rather than in pinions and answer out loud in a room without flinching the one sentence that kills more simplification programs than every other competitor you’ve ever met combined. And here’s the plan. It’s three moves. Audit the 12 and size the top in $3. Pick one reversible move and run it for 30 days and write the pushback script and rehearse it with your commercial team before you need it. Remember, it’s coming on Monday morning before you even got a chance to get the stuff in. So, you’re going to need it at 7:40. Prepare yourself. This is the
[04:04] thousandday CEO and I’m Bill Canady. Let’s get into it. Starting first with here’s the problem. Let’s define quad 4 precisely because it gets used loosely and loose definitions produce loose loose decision. Segment your customers into A and B. A is the vital few at the very top. They’re the ones we want to keep. B is everything else. You don’t need C and D. You see the ones you want, the ones you don’t want. Segment your products the same way. Now you got four boxes. Quad one is A customers buying A products. That’s your business. Protect it with everything you have. That’s the fort. You want to treat it as such. Quad two and three are the mix boxes. Good customers buying tail products, small customers buying core products. These are opportunities. And they’re in a different episode. It’s coming up. So keep listening. You’ll get there. Quad four is be customers buying tail products. The bottom of your customer base buying the bottom of your product line. That’s what quad four is. We’ve talked a lot about that in previous episodes. Quad four is where profit goes to die. And here’s the number that makes people set up. In most middle market industrials, quad 4 is around 4% of revenue. 4%. That’s right. Which sounds like a rounding error. And that’s exactly the trap. It may be 4% of revenue, but it’s somewhere between 20 and 40% of capacity. 4% coming in soaking up something less than just half of your business. That’s not good. 20 to 40 order lines, service menace, expedites, credit memos, engineering changes, skew helds, quote revisions, collection calls. Everyone is a unit of capacity, and Quad 4 consumes them at five to 10 times its share of revenue. It’s easy. They’re small customers buying products you don’t really want to sell. They don’t have the systems to handle it. They’re going to depend on you to handle it, and you’re not making any money doing it. Now, here comes the moment. You will build this analysis. You’ll put it on a screen and somebody in that room, usually somebody senior, usually somebody good, usually somebody
[06:05] whose compensation is attached to revenue, think salesperson, will say this sentence, but that’s $4 million of revenue. I want you to be ready for that sentence because how your next answer in the next 30 seconds determines whether the next six months are real or are they just decorative. Are you just doing kabuki style theater here or you getting something done? Here’s the answer to it. It’s three parts. Part one, ask what the margin is on it. Not the gross margin off the ERP, the contribution after the cost to serve, order handling, service minutes, freights, returns, working capital, you know, all that stuff. Make somebody go get it while the room watches. It’s almost always somewhere between zero and negative. That’s right. Worse than zero, it’s a taker. Part two, ask what it consumes. Put the capacity number next to the revenue number. 4% of revenue, 30% of order lines. Say both out loud in the same sentence and let the room sit with that in the gap. Don’t let that just settle there. Part three, and this is the one that actually changes minds. Reframe the question. The question is not, “Do we want $4 million of revenue?” Of course we want $4 million of revenue. We’re not crazy. We’re in this thing to make money. The real question is, what would we do with 30% of our capacity if we got it back? And is that worth more than the $4 million at zero margin? My sense is yes. It’s always been yes for me. Can’t imagine it’s not going to be yes for you. And the answer is yes by a factor of three or four essentially every time. As I said earlier, it’s always been a yes for me. Which brings me to the line I want you to carry out of this episode. The 4% is not the cost. The 4% is the bait. Say that again. It’s not the cost. It’s the bait. It’s how to lure you in, get you on that line, hook it deep. It’s the thing that looks like revenue and functions as a trap. And it keeps you from doing the profitable thing because you can’t bring yourself to walk away
[08:07] from a number with a dollar sign in front of it. Look, it’s hard. You’re sitting here. You’re trying to make your number, make your budget, and now you’re going to take some away. Well, that’s exactly what we’re going to do. Now, why does none of this show up until somebody goes looking for it? Complexity is a silent killer or profit. And it’s silent for a structural reason, not a psychological one. There’s no expense category called too much stuff. Well, you might see it in your ENO, but typically it’s not too much stuff, and it gets hidden pretty easily. There’s no line on your profit and loss statement labeled complexity. There’s no actual acrual for it, no owner, no monthly variance report. So at heights where you can’t book it in capacity in cycle time in the 14% discount somebody granted in 2019 that nobody has revisited in the next three extra days it’s going to take to close the month because of the exceptional of the approvals that you’re needed. Your finance team cannot show it to you because your finance team can only show you things that have a line item. There is no line item here. Okay, here’s the part that keeps CEOs from being angry about it, which is important because anger makes you stupid in this particular meeting. Every one of these started as a good idea. We don’t say, “I got this really dumb idea going to cost us a whole bunch of money.” No, these are good ideas. Let’s go serve our customer. Every one of them. The custom configuration was to win win a real customer, not someone that made up idea. The extra channel was to reach a real market that you weren’t getting after. The pricing exception saves a real order in a quarter when you really needed it. Boy, we’ve all been there. The extra report answered a fair question nobody ever asked again. The extra layer was a good manager who needed a promotion and there was nowhere else to put them. Got to look after our people, right? Nobody in your building woke up and decided to make a company complicated. They made it a hundred reasonable decisions over 10 years. And the aggregate is a business that’s carrying 30% of its capacity on
[10:08] 4% of its revenue. Was just in a meeting this weekend and is exactly that. It’s like how did we get so much taken care of so little? So the instruction isn’t to stop being stupid even though you might think it. The instruction is concentrate don’t spread. That’s the whole discipline in three words. your resources, your attention, your capacity, your best people. Concentrate on the vital few, not spread evenly across everything you happen to currently do. It’s hard to do. People come up and got 25 ideas. We talked about it in the episode before. Get two or three things. Get one viewer’s better. Better to win something than advance a 100 things. Okay, here’s the framework I like using. I call it the dirty dozen. It’s 12 sources of unprofitable complexity. These are the 12 I look at for in every business in this order. Get yourself a pen. All right. First one, skew sprawl, the item master. Nobody is pruned. Run it by a 12 and 12 months volume and look at the bottom quartile. Second one, customer customization, special packaging, special labeling, special palletizing, special anything. Each one was a yes that became permanent. I know we said we’re going to do it a short period of time, but somehow it stays there forever and that adds cost. Number three, channel expansions, direct distribution, dealers, marketplace, national accounts, especially rep group. Every channel needs its own pricing, terms, and conflict management. It’s a lot. Number four, pricing exceptions. The oneoff deal price that never expired. Count how many active pricing exist in your top 10s. The number will surprise you. It always surprises me, but it will not surprise your CFO or your controller. They’ll be like, “I’ve been telling you folks this for a long time. Seems like you’re starting to listen.” Five, custom contracts, bespoke terms, bespoke SLAs’s or service level agreement, bespoke rebate structures. Everyone is a document someone has to read before answering a simple question. Takes time, adds complexity, adds cost. Six, low
[12:11] volume products. We see those all the time. Distinct from skew sprawl. These are real products, real part numbers that move 11 units a year and occupy a production change over supplier relationship and the shelf. You don’t want it. You’re not making any money there. Number seven, niche services. The thing you do for three customers because you did it once. Field calibration, custom kitting, installation in one region only. You know what they are. Time to go get rid of those. Get to augur those out. Eight redundant systems. Two ERPs from an acquisition you never integrated. Boy, if you only got two, you might be lucky. Sometimes you get 10 or 15. Some of them are just Excel, right? And they’re closing them from there. Three CRM, a pricing tool in a spreadsheet that disagree. We’ve got them all. Go in there, get rid of them. Nine, organizational layers. Count the layers between you and the person who touches the product. If it’s more than five in a $200 million company, you’re paying for translation. I was talking to fell earlier and they’ve got 11. good reasons how they all get there, but there’s no good reason to keep them. They’re not adding value. They’re slowing it down. They’re making you less nimble, and you’re paying for the privilege of it. 10. Meeting overload. Pull the calendars. Reoccurring meetings, headcount, hours per month, times loaded rate. It’s usually a bigger number than the last C cost initiative you ran. It’s one of the hardest things to get rid of. People hate meetings. They complain about them as they should, but they never want to miss them. So, get rid of the meetings. 11. report proliferation. Every report that gets produced and not read, there’s always someone who le read reads it and they think, well, this is important. They don’t want to get rid of it. Cancel them all. See who complains. See if you care. Put back the ones you need. It’s a simple way to find out. Same way with software. The tail. Cancel it for more than one month here and count the complaints. Zero complaints. I mean, that was free money. So, cancel them all. All right. 12. Process variation. Four plants doing the same job four ways. Three branches quoting the same product three ways, probably competing
[14:13] against each other. You’re paying for the variation and getting nothing back. That’s 12. Skew sprawl, customer customization, channel proliferation, pricing exception, custom contracts, low volume products, niche services, redundant system, organizational layers, meeting overload, and finally report proliferation plus process variation. That’s 12. There’s a lot. These are things that just are lowhanging fruit, but someone’s got to go do it. It’s worth your time. Put someone on it. How to get rid of them. Four steps. And step two is the one that most people get wrong. Step one, audit all 12. All of them. Not the three you already have opinions about. You assign an owner per category. You give them two weeks, no more. In fact, less is better because they’ll expand to do the time and they’ll wait for the last couple days anyway to before they start pulling it. And you ask for account a dollar figure, not a narrative. You just need a couple of numbers. Step two, pick the top three by dollars, not by drama. Now, I need to sit on this one. In every room I’ve ever been in, the loudest item is not the biggest item. The loudest item is the one with the best story attached. The customer who yells, the product line somebody’s proud of, the process fight two VPs have been having for three years. Drama is a terrible ranking criteria. It selects for the item with the most emotional energy around it. that’s not always the one you care about. People just get, you know, fired up about things. And when it’s usually the item with the sunk cost is highest and the payback is worse. So rank it by dollars. Contribution recovered plus capacity recovered price at your loaded rate. Two or the top three. That’s your program. Everything else waste. Go get those. They’re big. It’ll move the needle. Step three, build an elimination plan with a named owners and dates. a name, a date, a definition of done, not reduced skew complexity. Boy, I see that all the time. Instead, 947 SKs deactivated in the item master by March
[16:14] 31st. And the owner is Karen. We love Karen. Go get them. If you can’t write it that way, you haven’t decided anything. You’ve got a wish. Step four, right, the final one. Communicate loudly what you’re going to stop doing. Let people know. Make it loud. This is the opposite of what your instinct says. Your instinct is to do this quietly so no one panics. Quiet simplification does not survive contact with the first push back because when a customer calls and yells, the person who takes the call does not know where the policy is real. So they make an exception and 40 exceptions later, there’s no policy. Announce it internally in a room, externally in writing with dates and names and make it expensive to reverse. That’s not bravado. That’s engineering. You’re removing the option of quietly not doing it. You’re locking it in. You’re burning the boats. You going to get people on board. Now, let me show you what this actually looks like. $310 million, 32% gross margins, 8% ebida. Okay, not great. The first move that we did was that we froze the discount. We isolated quad 4 only book, right? Accounts that bought nothing but the tail product. That book carried average field discounts of 14%. 14 on price we didn’t want to make. People didn’t buy very much. 14 granted over the years by good salespeople one reasonable emergency at a time and never revisited because nobody’s job was to revisit them. We froze them. No new discount authority on that book. Existing discounts expire at the next order. That’s right. That’s that’s cold-hearted stuff right there, but it doesn’t make a difference. We budgeted to lose roughly a third of the volume. I want to be honest about that number. That was the plan. and we told the board that was the plan and we had run the play if we’d have lost the whole third. The result, the EBID rose 1.9 percentage points in the first quarter after implementation. And a second result I did not forecast and now look for every time. Finance recovered 90 days of capacity, 90 days. Their year had been full of exceptional
[18:15] approvals, credit memos processing, and pricing reconciliation on the book. And when the exception stopped, a quarter of the finance department’s year came back. I had no line iteming for that. Nobody does. That’s the point. That’s why you want to do it. All right. The second move, the commission ledger. At the start of Q2, the Quad 4 only book came off the commission le ledger. If you sold it, you no longer got paid for it. Three sellers chose to leave. Let that sit there for a second. I want to talk about that honestly because this is where CEOs lose their nerve and it deserves better than a slogan. Those were not three bad people. They were not cheating. They had been building a living on a book of business that was destroying value and they built it because we paid them. We designed the compensation plan. They optimized against it exactly as designed. We got what we were paying for. When we changed what we paid for, the economics of their job changed and three of them left. It changed enough because they left. Now, that is the trade and it’s a good trade. You lose resellers and you get a sales force pointed at quad one, but run it like an adult. Do it at quarter boundary, not midquarter. Make sure that people know this is coming. Tell them a four quarter or ahead. Don’t pretend it isn’t a pay cut for some of them. They can do arithmetic. They’re smart people. And the moment you insult their intelligent, you lose the ones you wanted to keep. Okay. The third move, payment terms. One of my favorite 187 Quad4 only accounts. moved to a credit card on order over a single weekend with 60 days of advanced written notice and we charged a fee for credit cards for God’s sakes cuz we had to pay it. 22 accounts declined fine by us. 22 out of 187 is about 12%. And I’ll tell you what those 22 had in common. They were disproportionately the accounts our collection people could have named from memory. They self- selected out. We didn’t have to fire anyone. We didn’t have to argue. We changed the terms and the accounts that were structurally unprofitable and they removed themselves. Thank the Lord. 60 days of
[20:16] written notices and politeness is what makes 22 a clean exit instead of a dispute. All right. Move number four, andQ minimum order value for those of you $500. Minimum order quantity at the skew level. Order count dropped 38%. 38. It’s a big deal. Average gross margin per order rose from 19% to 31%. I like that 12 points. The orders that disappeared were the $22 ones that cost $40 to process. You know what I’m talking consolidated. They stopped ordering four times a month and started ordering once. It’s good for them, good for us. Then the downstream effect, which is the one I pointed the board to. Customer service calls fail by enough that we close an outsource call center. We didn’t need those. That center existed to handle order status, expedite short order shipments called on high frequency, the small orders. Take away the small orders and the calls stopped. A whole vendor contract just ended. And that’s music to your ears. Nobody got laid off to produce that. We stopped doing the work. One structural point, and that one determines whether any of this survives. Do not let the people compensated on the revenue decide which revenue to cut. That’s right. Don’t let the salespeople decide what’s going. There’s a misalignment in incentives. It’s not a comment on anyone’s integrity. It’s a comment on incentives. And incentives always wins. It’s how you pay them. If your VP of sales on quad 4 exit list, that list will be short and it will contain accounts he already didn’t like. He already thought they were leaving. And it will be revised upward twice before it’s implemented. To build the decision differently, finance owns the analysis. Operators own the capacity numbers. The decision sits with a small group chaired by somebody with no commission exposure. Don’t ask them to take and eliminate themselves. Do it with people who are not judged by it. With you breaking the ties, you want to own the piece here. If it can’t get decided, you decide. Commercial gets a
[22:16] full voice and commercial owns the execution and the customer conversations because they’re the only ones who can. That’s their job. Commercial does not own the list. All right, the plan. Three moves. Move number one, audit the 12 and size the top three in dollars. Take the list, 12 categories, assign an owner to each. Four people with three categories each is fine. Take two weeks, one page per category with two things on it. Account and a dollar figure. Account means how many how many SKs in the bottom quartile? How many active price exceptions? How many recurring meetings over an hour with more than six attendees? How many reports produced monthly? A dollar figure means contribution recovered plus capacity recovered at the loaded rate. Make them show the arithmetic. Then rank by dollars and take the top three by dollars, not drama. Simple. Doesn’t matter what people are passionate about. Do it on what’s going to be impactful. Write the other nine on a separate page and put it in a drawer. You’ll come back to them soon enough. Having them visibly parked stops people reitigating the issue. They know what’s coming. They know where they’re focused. Now, second move. Predict one reversible move and run it in 30 days. That’s right. Reversible move. Might get it wrong. It’s one. It’s reversible. You’re going to try in 30 days. Reversible really matters. Your organization’s probably never watched you actually stop doing something. The first one needs to teach them that you will follow through. Not that you’ll bet the company though. Don’t bet the farm here. We don’t want to put it all on one roll of the dice. Pick something you could wind unwind in a week. Three good candidates and any one of them work. Minimum order value. Set it, publish it, watch the order count, margin per month for a month. Discount freeze on one defined book, one area. Pick something, not the whole company. It’s one book defined by segment with existing discounts expiring at next order. Or payment terms on one order account tier with 60 days of written notice. Pick whichever one your data supports is the best and your team
[24:18] will be least afraid of. You’re not trying to win a war in one month. You’re trying to get momentum. Get people excited. You’re trying to prove that a policy in this company is a policy. Measure two things at day 30. The margin effect and the capacity effect. The capacity effect is the one nobody logs and it’s the one that compounds over time. With your equipment producing things, you make money and a lot of it. Move three, write the push back script and rehearse it before you need it. You are going to get push back. Know what you’re going to say before you have to say it. This is the move no one does and it’s why programs die. Customers are going to push back. Distributors will push back. Your own salespeople will push back on behalf of customers who have not pushed back yet. Let them. Push back is not evidence you made a mistake. Push back is evidence the policy has reached somebody, which is the entire point of having a policy. So, write the script on a page and sit down with your commercial team and rehearse it with them out loud together with somebody playing the angry customer. That’s right. Make it real. It feels ridiculous, I know, but do it anyway. You’ll be surprised the impact. The alternative is a 26-year-old inside salesperson improvising your pricing strategy at 4:15 on a Friday. Good luck with that. And here’s the principle the script has to encode. Four things. You do not apologize for the strategy. You do not negotiate the principle in the moment. You do not promise to escalate. You do not invoke the supervisor as a possible source of relief. Let me take those one at a time because each one is a specific failure I have watched happen. You do not apologize for the strategy because an apology is an admission that the policy is a mistake and the customer will correctly hear it as an invitation to keep pushing. Be warm. Be sorry the change is inconvenient. Don’t be sorry about the decision. Right? You’re trying to save the company. You do not negotiate the principle in the moment because whoever is on the phone doesn’t have the information to trade correctly. And a concession made under pressure becomes
[26:18] precedent inside of a week. Transition terms are negotiable. Timing is negotiable. The principle is not. You do not promise to escalate because let me take this up the chain tells the customer the real answer lies somewhere else. And now they’ll wait for it. The person on the call is the company. That’s it. That’s who they are. Make sure they understand it. You do not invoke the supervisor as a possible source of relief. No, I’d love to help you, but they won’t let me. That’s the most human sentence in the world, and it is fatal. You’ve given away all your power because it tells the customer there’s a they and they can be worked on. The script itself is short. The change effective on this date. Here’s what it means for your account. Here are your two options. I can help you with transition and I’d like to. If the customer keeps pushing, repeat the two options. Same words, warm, unhurried, identical. Repetition is the technique, not volume, not cleverness. The same two options delivered in the same way the fourth time as calmly as the first. All right. What does it look like when it’s working and when it’s theater? Working is quiet and countable. Skew count is down. And you can say by how many? Order count is down and margin per order is up. A vendor contract got cancelled. Someone’s calendar has four or fewer recurring meetings on it. And when a customer calls to complain, three different people give them the identical answer. That’s key identical answer without checking with each other. Theater is complexity reduction initiative with a name and a logo and it looks pretty. Theat’s re rationalization committee that meets monthly and produces a list of candidates. Theater is a quad four exit list that’s been revised upward three times and hasn’t lost a single account yet. The test is simple and it’s a count. How many things have you actually stopped? If the answer is zero, you’re running theater no matter how good the analysis and the analysis usually excellent and that’s what makes it convincing. All right, three things worth keeping. Number one,
[28:19] quad 4 is a B customer buying B products, buying the tail products, and it’s where profit goes to die. It may be 4% of revenue, but it’s somewhere between 20 and 4% of capacity. When someone says, but there’s still $4 million more dollars of revenue, you answer with the margin after cost to serve. the capacity number next to the revenue number and the reframe. What would we do with a third of our capacity back and what is it worth? Is it more than the $4 million at zero margin? The 4% is not a cost. The 4% is the bait. Two, the dirty dozen, the skew sprawl, customer customization, channel proliferation, pricing exception, customer contracts, custom contracts, low volume products, niche services, redundant systems, organizational layers, meeting overload, report proliferation, process validation, process variation, audit all 12. Pick the TW top three by dollars, not drama, named owners, real dates. this is important and announce loudly what you’re going to do to stop doing these things. Every one of these started as a good idea. They were, but now it’s over. Which is why you can’t be angry about it. And you can’t leave it alone. Three, the line gets tested immediately. So, write the script first. You don’t apologize for the strategy. You do not negotiate the principle in the moment. You do not promise to escalate. Very simple. Those three things will help you a lot. You do not invoke the simpleizer as a possible source of relief and keep the decision away from the people paid on revenue. Discounts are frozen that book off the commission ledger. 187 accounts to credit card on order. A 500 morning minimum order value. Orders down 38%. Margins per per order from 19 to 31. Ebida up 1.9 points and a quarter. I like that. 90 days of finance capacity back. one call center closed. This business is ready to leap off the page and run. It’s going to grow. It’s going to grow profit. Nobody was laid off to produce that. We just stopped doing things. So, concentrate. Don’t spread.
[30:22] Oh, and the distributor who emailed at 740 on that Monday, we said no on the priceold, no on the expanded terms, and offered them the quad one program instead at list. 6 weeks later, they took it. They’re still a customer at roughly twothirds of the volume and about triple the contribution. Triple. That was a trade we were willing to make. I’m Bill Canady. Now go do the work. >> You’ve been listening to the 10,00 CEO with Bill Canady. Follow the show for more decisive leadership, sustainable growth, and strategies that build enduring businesses. Until next time, make every day count.
