Managing Your Business With Profit Centers

Financial accountability has always been a top priority for Data Recognition, Inc., an automatic identification and data collection VAR. In its October, 1995 issue, Business Systems Magazine told how Data Recognition has managed to grow while remaining debt free.

Since that last article, Data Recognition (Austin, TX), has taken its approach to financial accountability one step further. The VAR recently created three distinct business units, which the company treats as individual "profit centers," according to Steve Terry, v.p. of systems.

The profitability of each of these business units - printers/consumables; handheld data collection terminals/bar code scanners; and systems, software, training and consulting - is now measured on their own, independently. Previously, revenues from those services and different product lines were lumped together when the company evaluated where it was making - or losing - money. In addition, the company now generates daily profit/loss statements for each of the three units.

Terry explains, "We saw the importance of evaluating, individually, areas of our business that are distinctly different. The profit centers have allowed us to better identify our specific gains and losses. And that's critically important for a growing business."

Identifying Profit Centers
Data Recognition's three profit centers - or business units - are as follows:

1) Bar-code printers/label media - Bar code printers differ from other AIDC hardware in that VARs must service printers more frequently. The printhead - the mechanism used to imprint bar code labels - gradually wears from the first time the printer is used. "We consider our employee's time a resource," Terry says. "We wanted to compare the amount our technical people time spent servicing printers, versus the revenues generated for the service."

Data Recognition grouped label media - such as label stock and thermal/thermal transfer ribbons - with printers because end users have to continually buy consumables.

2) Handheld data collection computers (terminals)/scanners - Data Recognition considers handhelds and scanners separately from printers because end users don't need to have the former serviced as often.

3) Systems, Software, Training and Consulting (SSTC) - This business unit is the company's "non-product" arm. According to Terry, it includes non-repair services like customizing software, configuring and installing end users' systems, and training end users.

"For example, installing and supporting a radio frequency system is much more complicated than selling a scanner and shipping it," he explains. "While an RF system might generate more revenue, it requires more people and more time to support it."

Should You Create Individual Profit Centers?
According to Terry, forming individual profit centers became necessary partly because of Data Recognition's recent growth. In October, 1995, when BSM first profiled the VAR, its revenues stood at $6.7 million. Since that time, the company has more than doubled its revenues, reaching $14 million this year.

Previously, Data Recognition's principals, Ed Dato (president), and Andy Anderson (CFO), were the only ones to review the financial statements on a daily basis. Terry and the managers of the other business units used to review them once a month. Now, Terry and those other managers also review the statements every day.

"As we grew, it became more difficult for Ed and Andy to have the same level of scrutiny. That's true of the principals in most growing businesses. Now, we're better able to spot problems because we have more people looking at the statements. And, the people who review them now are also closer to those aspects of the business. So they're more likely to spot discrepancies."

However, growth was not the only factor that prompted Data Recognition to create separate business units. Another motivation was the changing nature of the AIDC industry. "It used to be common for VARs not to charge end users for services like installation and training," Terry says. "Rather, many VARs tried to recoup, through hardware sales, what they lost by giving away services. Now, most AIDC hardware is heading toward commodity status - if it isn't there already - because most of the mystery is gone from the hardware. That's why so many catalog distributors have emerged.

"Because of diminishing hardware margins, VARs can no longer be profitable just selling keyboard wedges and laser scanners," Terry explains. "VARs and resellers have to look for additional ways to add value for customers."

Data Recognition has sought to provide a "value-add" primarily through its systems, software, training and consulting unit. "End users can't get services - like training and consulting - from a catalog." However, Terry contends providing a value-add is only half the battle for VARs. Another challenge is identifying ways to provide value-added services more efficiently and cost effectively. Terry, Anderson and Dato recognized this challenge.

"We used to track our gross margins," Terry says. "But we didn't track our costs for providing products and services as thoroughly. Looking just at gross margins is misleading, and insufficient.

"It's important to know why you're making or losing money providing services," Terry adds. "Losing money could result from not billing customers for services you should be charging them for. It's a substantial cost to have technical people on staff. So when they're not kept busy enough, that's a huge cost in terms of lost productivity. Even beyond that, the computers and office space they use cost money."

Lessons Learned From Profit Centers
Prior to forming the profit centers, Data Recognition lost $5,000 on an installation. Data Recognition and the customer had agreed on a price in advance. Data Recognition based its price on an estimate of how many man-hours would be needed to install and customize the system.

However, those efforts ended up taking three times longer than expected because the customer continually demanded modifications to the system after it had been installed. Because the price had been pre-determined, Data Recognition couldn't seek payment for the additional hours it spent. The result? The company learned the importance of agreeing with customers - prior to installations - on system specifications.

Adds Terry, "The system met the customer's expectations. But we had to spend a lot more time than we expected bringing the system to that point."

In addition, Data Recognition also has learned the importance of explaining to customers - prior to the installation - that they will have to "take ownership of the system." For example, Terry says that a different customer wanted Data Recognition to help manage the data the customer collected with its system. "We spent some time - that we were never paid for - helping the customer manage the data," Terry says. "From a customer-relations standpoint, it was the best thing to do. We didn't want them to think we were trying to 'nickel and dime' them. But it wasn't a cost-effective approach. Without separate profit and loss statements, we might not have realized how much revenue we were losing by not billing customers for certain services," he adds.

Profit Centers Ease Concerns
According to Terry, Data Recognition would have a "much more difficult" time managing its growth had it not established the profit centers. "I'm much more confident about our ability to remain profitable in a changing industry like AIDC," he concludes. "Companies have to have the ability to adapt, especially in turbulent business times. Establishing profit centers, and generating daily profit/loss statements, has allowed us to better identify, and correct, our weaknesses.

"One could argue losing $5,000 on a project isn't going to put a $14 million company out of business," Terry adds. "But, if we lose a penny, and it could have been avoided, then we feel we've lost too much."